Emerging market debt extends gains on Fed's change in language

By Reshmi Basu and Paul Deckelman

New York, March 21- Emerging market debt surged Wednesday, as the Federal Reserve changed the language on its statement accompanying its decision to keep interest rates steady, which raised bets that a rate cut is in the cards.

During Asian trading hours Wednesday, Asian credits saw two-way flows amid a busy session. Real money accounts were seen active in high quality names, while dealers were focused on high-yield credits, noted a market source.

By the time New York trading rolled around, emerging markets sovereigns moved higher in cautious trade ahead of the Federal Open Market Committee decision. Spreads on the JP Morgan EMBI+ index tightened by 2 points to 177 basis points versus U.S. Treasuries as the market traded in tandem with firmer U.S. stocks.

By the afternoon, the asset class was on a tear as spreads on the EMBI+ index tightened another 2 basis points to 175 bps following the Fed's announcement in which it kept benchmark lending rates unchanged at 5¼%.

But more importantly, sources noted that the focus was on the post-meeting statement, in which the Fed removed "additional firming" from its statement while noting that inflation was still a concern.

Investors interpreted the statement as more dovish, which sparked a triple digit gain in the U.S. stock market.

Against that supportive backdrop, emerging markets had only one way to go and that was up, according to market sources.

"It had a big bullish impact for the market - all over Latin America - to debt, to currencies to equity markets," remarked Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

Among Latin American benchmark names, the Argentinean discount bond due 2033 gained 0.80 to 115.60. The Ecuadorian bond due 2030 added 0.70 to 86.75.

But despite the bullish tone, liquidity on the sovereign side remained timid, noted Alvarez.

"A lot of offers got hit. Prices started to rise," he said, but added, "It just seemed to be one concise wave after the Fed statement and then afterwards it plateaued."

Brazil 2040 hits new high

Nonetheless, the market did forge new ground by piercing new historical price levels, such as Wednesday's impressive run by Brazil.

During the session, the Brazilian bellwether bond due 2040 was higher by 0.80 to 135 bid, marking a new high.

Latin American corporate bonds also witnessed improved bids, perhaps ¼ to ½ point higher, according to a Latin America corporates trader, who added that it was "not as significant a move as 200 point rally in the Dow would suggest."

Arab Banking issues new debt

In other primary news, Arab Banking Corp. (BSC) placed a $500 million offering of 10-year subordinated lower tier II notes (Baa2/BBB+/BBB+ issuer ratings) at 99.914 with a coupon of three-month Libor plus 85 basis points.

The floating rate notes will be non-callable for five years. If the notes are not called, the coupon steps up by 50 basis points.

Citigroup and JP Morgan were joint bookrunners for the Regulation S deal, which was issued under the issuer's $2.5 billion euro medium-term note program.

Headquartered in Manama, Kingdom of Bahrain, the issuer is an offshore commercial bank.

Brazil's 2028 bonds up

Meanwhile, Brazil's reopened local currency-denominated bonds due 2028 were seen firmer in the secondary.

On Tuesday, the country sold an additional R$750 million or $362 million equivalent of the 2028 bonds (Ba2/BB/BB) at 993/4.

On Wednesday, the deal was spotted trading at par levels.

"It was a very good timing for Brazil," remarked Alvarez, noting that investors had to also consider the strength of the Brazilian real.

"The 2 to 1 bid to cover ratio had been a little less enthusiastic," he said, adding that the sovereign may be competing with the heavy slate of issues coming from the Brazilian corporate side.

Barclays Capital and Citigroup were joint bookrunners for the offering, which was registered with the Securities and Exchange Commission.

With the additional bonds, the total size of the deal stands at R$2.25 billion.

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