Emerging debt-Brazil bounds higher after bond sale

<a href=>Reuters, 04.30.03, 12:18 PM ET By Susan Schneider

NEW YORK, April 30 (Reuters) - Brazilian sovereign bonds wriggled higher on Wednesday, building on year-to-date returns of nearly 33 percent as the country's sale of a $1 billion global bond -- its first in a year -- reinforced investors' hopes for the new government's economic policies.

Brazil's share of the J.P. Morgan Emerging Market Bond Index Plus added 0.87 percent in terms of daily returns, underpinned by a 0.5 point increase in the country's benchmark C bond <BRAZILC=RR> to 87.375 bid.

With the $1 billion issue, Brazil tapped into investors' giddiness for President Luiz Inacio Lula da Silva's record so far. Lula, the source of fierce angst on Wall Street last year because of his one-time talk of debt renegotiation, has seduced investors with his avowed reform agenda and fiscal austerity.

Investor optimism for Brazil continued to reign after the bond issue, which was increased from the government's original plans to sell a $750 million deal, as the country's debt clung to recent gains, said analysts and traders.

"This is the first test as to whether there would be profit-taking," and so far the bonds have held their ground, said Siobhan Manning, a Latin American debt strategist at the Italian investment bank Caboto.

On Wednesday morning, Brazil's Central Bank chief Henrique Meirelles hailed his nation's return to global capital markets as the end of the financial crisis that had pummeled Latin America's biggest economy last year ahead of the elections.

But in spite of the afterglow generated by the bond, Brazil's broader debt performance will hinge on Lula's ability to cement congressional support for his reforms, said analysts. Lula is expected to send Congress the tax and pension reform packages later on Wednesday.

The reform effort "is going to be important because for Brazil to test these levels on the upside, they need substantial progress on the reforms," said Manning.

The rosy mood in Brazil helped lift a number of its neighbors in Wednesday's session. Ecuador's debt added 1.89 percent on the day, while Venezuela jumped 1.39 percent and Colombia gained 0.41 percent, according to the EMBI-Plus.

"Basically the market is trading in a range this morning, sustaining gains from last night," but volume was light, said an emerging debt trader.

Argentina's bonds -- a marginal player in the market since the nation's debt default last year -- also churned higher as the debt recovered from this week's downturn fueled by disappointment over Sunday's first-round presidential election. The nation's share of the EMBI-Plus trekked up 2.45 percent.

Former Argentine President Carlos Menem took the biggest share of the votes but Gov. Nestor Kirchner came in a close second. Because the vote was split among a string of politicians, the two will battle it out in a May 18 run-off.

For now, Wall Street expects Kirchner to emerge victorious thanks to securing the support of some candidates eliminated on Sunday and because of Menem's high rejection rate among voters. Many Argentines blame Menem for laying the foundation of the country's messy currency devaluation and default.

Kirchner is less liked by Wall Street than Menem, who won over investors with free-market reforms during his two presidential terms in the 1990s. A key reason behind the sentiment is investors' view that Kirchner's debt restructuring proposals are less friendly to bondholders, analysts said.

Still, either candidate faces a long list of challenges after May 18, said Manning.

"Bottom line is that they both have a tough agenda," she said.