Tight ranges for emerging market debt amid Fed move; Colombia's new issue scores in secondary

By Reshmi Basu and Paul A. Harris

New York, Nov. 10 - Trading for emerging market remained motionless Wednesday as the Federal Reserve stuck to its game plan.

Activity was slow as the market waited for affirmation of the Fed's decision as well as its statement, according to a Latin America debt strategist at Refco EM.

"There hasn't been any changes and I think the market was expecting that - not a lot of activity overall in emerging markets," the strategist said of the outcome of the FOMC meeting.

During Wednesday's session, emerging market debt continued to trade in tight ranges. The JP Morgan EMBI+ fell 0.08%. Its spread to Treasuries tightened three basis points to 392 basis points.

The Brazil C bond was down 1/8 of a point to 99 1/8 bid while the bond due 2040 lost 0.10 to 111.90 bid. Russia's bond due 2030 slipped 5/8 of a point to 99 7/8 bid.

As expected, the Federal Open Market Committee increased its benchmark lending rate by a quarter percentage point to 2%. In its statement, the FOMC indicated that another rate hike was on the way at its Dec. 14 meeting.

"With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured," according to Wednesday's statement.

In reaction, U.S Treasuries market took a hit. The yield on the 10-year note rose to 4.24% from Tuesday's 4.22%.

And the U.S dollar fell to a new all-time low against the euro after data showed that for the fourth straight month the U.S trade deficit was above $50 billion in September. The euro was at $1.2895 in late trading.

More local currency issuances expected

The continued weakness in the dollar may push more issuers to issue in their local currencies just as the Republic of Colombia did on Tuesday. The country successfully priced an upsized $375 million equivalent of global notes 2010 (Ba2/BB/BB) at 99.658 to yield 11 7/8% via Citigroup. The issue is peso-denominated and payable in U.S dollars.

Furthermore, the new issue is performing extremely well in the secondary market, according to a buyside source. It was trading at par to 100¼ on the bid side, said the source.

Investors can expect to see more copycat issues, according to the source.

"I think everybody agrees we are starting to see a trend where more issuers will come to the market targeting external foreign investors with deals that are denominated in their own currencies.

"It's going to be good for the issuers because they are going to have exposure to their own currency and it's also something that the market wants.

"Investors are feeling a lot more comfortable with local currencies in these countries. And external debt is just so tight, there's not a lot of yield left there.

"Everyone is trying to get more yield by stepping into the global currency market," said the buyside source.

Brazil is expected to be the next sovereign to tap its local currency, according to the source.

"If it goes into the corporate land, I think it's going to start with the tier 1 corporates/higher grade corporates that will be able to get access like that."

Ultrapetrol prices

In the primary market, Ultrapetrol (Bahamas) Ltd. priced an upsized $180 million offering of 10-year senior secured notes (B3/BB-) Wednesday at par to yield 9% via Credit Suisse First Boston.

In trading, the bond due 2014 was at 100 bid, 100½ offered.

Ultrapetrol is a Nassau, Bahamas-based shipping company operating primarily in South America, offering platform supply vessels to the offshore oil sector.

Last Friday, STATS ChipPac priced $215 million seven-year senior notes at par to yield 6¾% via Deutsche Bank Securities and Lehman Brothers.

In secondary trading Wednesday, the company's bond due 2011 was at 99½ bid, 100 offered.

The company is a service provider of semiconductor packaging design, assembly, test and distribution solutions, based in Singapore and Fremont, Calif.

Emerging market paper trading in ranges

Emerging market debt has been trading in narrow ranges during recent sessions, and appears unable to snap out of the current trend.

Investors could expect to see a little bit more activity in emerging markets if United States economic data were to show that the economy is weaker, something which the Refco strategists does not anticipate to happen.

"If the price of oil keeps on coming down, I think that is a positive for the [Latin America] region. It's going to bring a little bit of pressure in Russia, Venezuela and Mexico. But overall, lower prices are welcome in Latin America," he said.

Meanwhile, coming below expectations, Brazil's industrial production growth rose to 7.6% in September, the slowest pace in six months.

"The changes on interest rates in the past few months are taking their toll on the industrial sector. And I don't see that it's going to improve.

"So locally in Brazil, we are going to see a bit of weakness in the weeks to come," he said.

By the end of the year, the debt strategist said investors will begin reshuffling and strategizing as 2005 approaches. Some investment houses have backed Turkey and Brazil for next year.

"Maybe positions will be taken and that is going to bring the opportunity for emerging markets to move higher.

Mexico's inflationary pressure

On Tuesday, Mexico reported that inflation in October rose to a 19-month high of 5.4% from 5.1% in September. It is now expected that the central bank will raise interest rates two more times this year.

The central bank has set a target rate of 3% inflation at the close of the year.

"The inflation over the past 12 months is well over 5%," said the Refco strategist.

"We're expecting a more aggressive position by the central bank. They are going to increase interest rates by more than what was expected.

"And the local analysts are talking about close to 75 basis points by year-end.

"I think that's very important and that's going to put down more pressure on all the fixed-income securities in Mexico," he noted.

The Mexico bond due 2008 was bid at 114, down 0.35 in trading Wednesday.

In other news, opposition parties have stopped the impeachment proceedings against Ecuador president Lucio Gutierrez. Several members of Congress refused to vote in favor of the impeachment. Gutierrez was accused of corruption in this year's municipal election campaign.

The Ecuador bond due 2012 gained 0.35 to 100.65 while the bond due 2030 was unchanged at 100.65 bid.

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