Emerging market debt tracks equities; Turkey up on rate rise; Brazil's Cosipa sells $200 million bonds

By Reshmi Basu and Paul A. Harris

New York, June 7 - Emerging market debt saw another volatile session Wednesday while Brazilian bonds outperformed the market on the country's decision earlier this week to buy back $4 billion of foreign currency-denominated bonds.

Meanwhile Turkish bonds were boosted by a bigger than expected increase in borrowing rates that reassured investors about the country's resolve in fighting inflation.

In the primary market, Cosipa Commerical Ltd. sold $200 million of 10-year bonds (Ba2/BB+) at 99.165 to yield 8 3/8%.

Brazilian steel producers Usiminas and Cosipa will guarantee the bonds.

ABN Amro and UBS were joint lead managers for the Rule 144A/Regulation S transaction.

Emerging market posted small gains Wednesday as U.S. equities whipsawed on continuing worries about a potential cool down in the U.S. economy and the undefined direction of U.S. monetary policy.

The Dow Jones Industrial Average index posted its fourth straight losing session while the Nasdaq recorded its worst performance in seven months.

A seesawing equities market made for a volatile session in emerging markets, noted market sources.

"I think again we've been tracking equity markets for most of the day," remarked Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

"It remains a volatile market that is highly dependant on U.S. equities and on base metals in the commodities camp," he added.

Nonetheless, the technical story was Brazil's saving grace as the buyback announcement helped the country's bonds outperform the market.

On Monday, the country's treasury announced an up to $4 billion buyback of external debt via a modified Dutch auction. Including this tender offer, Brazil will have repurchased $15.7 billion so far this year, according to a market source.

During Wednesday's session, the Brazilian bond due 2040 added 0.45 to 124.20 bid, 124.35 offered.

Turkey up on rate increase

Meanwhile, Turkish bonds gained on the long end of the curve. The central bank announced that it would hike its overnight borrowing rate by 175 basis points to 15% to curb inflation.

The larger than expected increase was necessary to help alleviate investor jitters, according to a market source.

Last Friday, the Turkey Statistics Institute (TUIK) reported that the consumer price index surged 1.88% in May, the sharpest increase since October 2004. And the producer price index gained 2.77% month on month.

As a result, Turkey's external and local markets came under heavy pressure on Friday.

And since then, investors have been in a risk-reduction mode.

But the market saw a reprieve Wednesday, triggered by the central bank's decision.

Market consensus was for a 50 basis point hike, according to the source. However, a hike of 100 basis points or more would make a comforting statement to investors that the central bank is committed to fighting inflation,

Hence the market's reaction to 175 basis points was seen as extremely favorable and helped alleviate some of the recent pressure on the lira.

In late trading Wednesday, the Turkish bond due 2030 was spotted up 1.63 to 143.25 bid, 143.75 offered.

Overall, trading volumes were described as somewhat light, according to a trader,

Even though the market tends to turn more illiquid during the summer session, the asset class has been backed into a corner by the lack of definition by the Federal Reserve, according to Alvarez.

The Fed is facing a credibility issue because it has not provided a clear mandate as to which direction it is heading, he added.

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