Brazil to Sell 10-, 30-Year Bonds to Set Benchmarks, Valle Says

May 18, 2009

Brazil may offer more 10- and 30-year bonds in international markets this year, tapping into demand for the country’s most-traded securities, Deputy Treasury Secretary Paulo Valle said.
“Our strategy is to keep offering 10- and 30-year bonds,” Valle, 45, said in a phone interview from Brasilia. “That helps improve the liquidity in these important benchmark points.”

The government sold $1.78 billion of 10-year notes in January and May, part of a wave of new issues by developing nations as the global financial crisis eased. Developing-nation governments and companies sold more than $57 billion of debt this year through the first week of May, up from $34.8 billion during the same period in 2008, according to data compiled by Bloomberg.

Brazilian bonds have outperformed other emerging-market debt in the past year as President Luiz Inacio Lula da Silva’s buildup of record foreign reserves of more than $200 billion helped maintain investor confidence in Latin America’s biggest economy amid the global crisis. Brazil’s foreign bonds returned 3.1 percent in the past 12 months while emerging-market bonds on average declined 2.2 percent, according to JPMorgan Chase & Co.

Brazil sold $1.03 billion of the 5.875 percent bonds due in 2019 in January to yield 6.13 percent, or 3.7 percentage points above U.S. Treasuries, and $750 million at 2.52 percentage points above Treasuries on May 7.

Buyback Program

The Lula administration also plans to keep buying back less-traded bonds with high interest rates such as the securities due in 2020 and 2030 to focus trading in the newly created benchmarks, Valle said.

The government is repurchasing an average of about $100 million of bonds each month, he said. Buybacks in the program, which began in 2006, slowed as credit markets seized up late last year before picking up again in recent weeks, he said.

The older securities trade at a higher yield spread than the newer notes, creating pricing distortions that Brazil wants to eliminate, Valle said. The 2020 bonds, for example, yield 3.14 percentage points above Treasuries, according to JPMorgan. By comparison, the new 2019 bonds yield 2.73 percentage points more than Treasuries -- or 0.41 percentage point less than the 2020 securities.

“These old bonds have distorted our yield curve,” Valle said.

Brazil’s foreign bonds have returned 1.4 percent this year after gaining 5.9 percent in 2008, according to JPMorgan.

‘No Complaints’

The price on the 5.875 percent bonds has climbed to 100.25 cents on the dollar, pushing the yield down to 5.84 percent, from 98.1 cents in the January offering.

The bonds underperformed securities issued by Colombia, Turkey and the Philippines in the first several days after the sale, prompting David Spegel, head of emerging-market strategy at ING Financial Bank NV, to say Brazil sought to price the notes at lower yields than investors were willing to accept.

Valle played down those concerns, saying pricing the notes was difficult because the bond market remained volatile in January amid the global crisis.

“We were the first emerging-market country to offer a new bond in January when volatility was high,” Valle said. He said it was easier to sell the notes in May as demand was more than double that in January. “Things were clearer” in the market, he said. “And we had no complaints.”

By Renato Andrade
Source: Bloomberg (www.bloomberg.com)