Emerging Markets: End of the C-Bond Era



On a tear: Brazils stock indexes are surging

Ranked as the worlds most-traded emerging market security for nearly a decade, Brazilian capitalization bonds (C-bonds) will soon be a thing of the past. The government will exercise a call option on its outstanding $1.2 billion worth of 8% C-bonds due in 2014 on October 17.

The government had bought back $4.4 billion worth of the bonds through a swap in July. C-bonds were issued in 1994 as part of the countrys debt restructuring, for a total of $7.4 billion. Semi-annual principal payments began in April 2004, and according to the Emerging Markets Traders Association (EMTA) the bonds had accounted for nearly 10% of all EM debt traded through 2003. Brazils 11% issue maturing in 2040 has since replaced C-bonds as the most heavily traded EM security.

There is speculation that the government will increase the sale of 8.75% due 2025 bonds to as much as $725 million to finance the C-bond buyback and to finance 2006 expenditures, taking advantage of the current investor appetite for higher-yielding paper amid a drop in US treasury yields.

Following a fourth consecutive month of deflation in August, the government is expected to begin pushing for lower interest rates thattogether with strong corporate results and a stronger-than-expected 3.9% year-on-year second-quarter 2005 GDP gainwill further boost interest in local equities. The Bovespa index gained 12% between mid-June and early September, and analysts predict it will soon break the 30,000-point threshold from current levels just north of 28,000 points.

An ongoing political scandal is turning President Luiz Incio Lula da Silva into a lame duck president. In a pre-election political move, Lula has proposed boosting social spending in 2006. Lawmakers approved a 15% wage hike for congressional workers in September, which Lula had vetoed and which could cost the government an extra $260 million. With Lula standing on shaky ground, the move marked the first time that a presidential veto was overridden since 1998.

Antonio Guerrero