Market weaker trailing FOMC statement; Brazil taps Mantega to replace Palloci; Absolut Bank prices deal

By Paul A. Harris

St. Louis, March 28 - Although different sources heard different nuances in the statement that accompanied the Federal Open Market Committee's 25 basis points increase in the Fed Funds rate on Tuesday, all agreed that in the wake of that statement the market sold off.

What sources seemed to key on was the FOMC's assertion that "some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."

However the statement also made reference to "inflation pressures" which could be triggered by possible increases in resource utilization in combination with the elevated prices of energy and other commodities.

"Stocks and Treasuries sold off pretty dramatically after the news," a trader commented, adding that it was actually pretty quiet in the emerging markets at the end of the day.

The source said that the long end of the Philippines curve "got hit a little" and spotted the Philippines' 7¾% bonds maturing in 2031 at 100.625 bid, off 0.375 on the day.

A glass half full

Meanwhile a buy-side source, also parsing the Fed statement, keyed on the word "may," as in "policy firming MAY be needed," and commented that the statement seemed "pretty benign."

"'May' is a big word in my mind as I look at that statement," the buy-sider said.

"Other people have focused on the discussion of energy prices possibly being a flow-through and the mention of the recovery of the economy from the fourth quarter as indicators that Bernanke is going to raise rates at least once more, and probably twice more.

"He probably will raise rates once more," the buy-sider conceded.

"But going into this I was bearish. Seeing that statement I am more inclined to be bullish.

"The market obviously took it the opposite way."

This source also said that the market had fallen Tuesday, but added that taken in light of a 10-year Treasury that was going out at 4.78%, eight basis points higher than the Monday close, it was a pretty strong performance by emerging markets debt.

This source spotted Brazil's benchmark 11% dollar-denominated bonds maturing in August 2040, said to be the most liquid issue in the emerging markets asset class, trading just before the close at 128.50, down 0.80 on the day.

"The 2040s are 10-year bonds at this point because they are callable in 2015, so if anything they are outperforming Treasuries," the source added.

Shortly after the close a trader spotted the Brazil bonds maturing in 2040 at 127.75 bid, down 0.75 on the day.

EM analyst eyes interest rate markets

With the Fed Funds overnight rate ending the Tuesday session at 4.75% and the 10-year U.S. Treasury yielding just three basis points higher at 4.78%, Prospect News asked one emerging markets analyst whether the prudent money was starting to position for a 10-year Treasury that would soon yield 5%.

Noting that emerging markets bonds weakened by three-quarters of a point on Tuesday, the analyst, speaking on background, replied that there could be even more selling to come if the 10-year keeps pushing toward 5%.

"I think the big thing to watch today was the carnage across global interest rate markets," the analyst added.

The source noted that the 10-year euro swap rates were up 0.104% on the back of the Fed move and the strong numbers posted by the Munich-based IFO business confidence index, which rose to a 15-year high.

"The Japan 10-year rates were also up a good bit," the analyst added, quantifying the move as four basis points higher on the day.

"Monetary conditions are tightening all over the world and EM has only just begun to adjust."

Venezuela, Peru hold in

In the face of the general market sell-off, the sovereign debt of two countries held in.

Venezuela was the beneficiary of news of a sharp rise in crude oil prices on Tuesday. A trader spotted Venezuela's liquid benchmark issue of 9¼% dollar-denominated bonds maturing in September 2027 trading at 126.75 bid, 127 offered, up half a point on the day.

"Spreads held in at the end of the day," the trader said, adding that the market was two or three basis points wider on a spread basis trailing the FOMC statement.

This source also had the lately pummeled sovereign debt of Peru firming on the Tuesday session.

News that presidential candidate Ollanta Humala - a leftist and a former military officer who is campaigning on a platform of higher taxes and tighter restrictions on foreign investments - is ahead in the polls may have caused the bonds to be oversold, the source added.

"Some people may have been caught short," the trader commented, spotting Peru's bonds maturing in 2033 closing at 112.75 bid, 113 offered.

Before the U.S. open on Tuesday, a source sent a run of prices on the Peru 2033 bonds which showed them at 110.12 bid, 110.77 offered on March 20, climbing steadily to 112.30 bid, 112.70 offered on Monday.

One source commented on Tuesday that the most recent polling in Lima seems to indicate that although candidate Lourdes Floures, a center-right lawyer who is seen as pro-business, is trailing Humala ahead of the April 9 contest, she may be in position to defeat Humala in the second round.

Brazil's Mantega to replace Palloci

The buzz continued Tuesday concerning the resignation of Brazilian finance minister Antonio Palloci, made official on Monday.

The expectation, according to sources, is that Brazilian President Luiz Inacio Lula da Silva will shortly appoint state development bank (BNDES) president Guido Mantega as Palloci's replacement.

According to a market source, one of the givens about Mantega is that he has been seen opposing the monetary and fiscal discipline that Palocci brought to the job, and therefore may not be as market-friendly.

The source said that the Brazilian press is quoting Mantega as vowing to stay the course with regard to Palloci's policies of promoting sustainable growth, repaying debt and keeping inflation in check.

If that proves to be the case, the source added, Brazilian prices should hold in.

Absolut Bank prices $150 million

In the primary market, Absolut Capital (Luxembourg) SA, a subsidiary of Moscow-based Absolut Bank, priced its inaugural eurobond issue, an 8¾% issue of three-year bonds, at 99.352 to yield 9%.

The yield came right on top of price talk that had been revised to 9% from 8¼% to 8½%.

Merrill Lynch International ran the books.

Meanwhile Mexican mortgage and construction lender Metrofinanciera will begin marketing its $100 million offering of perpetual notes (expected B-) on Thursday in Asia.

Dresdner Kleinwort Wasserstein is the bookrunner for the issue which could be upsized depending upon demand.

The market source said that, while there is no official price talk yet on the issue, the notes are being "whispered" with a low double-digit yield.

Finally, Chartered Semiconductor Manufacturing Ltd. plans to price an approximately $300 million offering of seven-year senior notes later this week via Goldman Sachs & Co.

The Singapore-based semiconductor foundry company will use the proceeds to repay bank debt.

Ecuador to call $740 million bonds due 2012

As rumored late last week Ecuador is set to call a substantial portion of its dollar-denominated 12% bonds maturing Nov. 15, 2012.

Ecuador economy minister Diego Borja announced that the government will call $740 million of the $1.25 billion issue in May.

Last week a source told Prospect News that the Finance Ministry could make a partial call in May and take out the remaining bonds in November using cash reserves presently estimated to be approximately $1 billion, and proceeds from a possible bond deal in the $250 million to $300 million range, which has already been approved by the government.

Ecuador's reasons for doing only a partial call in May likely include recent disruptions in its crude oil production, the recent volatility in emerging markets and a reluctance to deplete cash reserves in the run up to October's general elections.

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