Emerging market debt lower in light volume; looking ahead to the Fed

By Reshmi Basu and Paul A. Harris

New York, March 21 - Emerging market debt continued to feel the squeeze from last week's sell off, as oil prices spiked above $57 per barrel before retreating.

Across the board, sovereign paper was down in light volume ahead of the Federal Open Market Committee meeting on Tuesday. The Fed is expected to raise rates by 25 basis points to 2¾%.

Fear of rising interest rates has put pressure on the asset class. Brazil's global due 2040 was spotted at 112.44 bid, 112.88 offered, down 0.39 on the day, as the yield on the 10-year U.S. Treasury topped 4½% and fuel prices continued to go up, said a market source. The C-bond fell 3/8 of a point to 99 5/8 bid.

Paper from Colombia and Ecuador was also hit. The Colombia bond due 2009 slid 1½ points to 109½ bid while the bond due 2020 dived 2¼ points to 121 bid. The Ecuador bond due 2030 was down 0.45 to 92.05 bid.

A trader said that the Venezuela's global bonds due 2007 were at 108 bid, 108½ offered, unchanged. The Venezuela global bonds due 2018 were at 131.50 bid, 132½ offered, up from 131 bid, 132 offered mid-day on Monday. The Venezuela bonds due 2027 were quoted at 99.95 bid, 100.80 offered in late trading, slightly firmer from mid-day levels.

With the market closed on Friday, this will be an abbreviated trading week with low volume.

"This week is going to have a lack of liquidity," said a Latin America debt strategist for Refco EM.

"The market is definitely paying attention to the numbers tomorrow [Tuesday]. And that's what is setting the tone for emerging markets, which have been under pressure from last week." he said.

In recent sessions, emerging market debt witnessed a flight to quality when General Motors Corp. issued an earnings warning. But the strategist said that the flight to quality was not as strong a driver Monday as it was last week.

On top of that, the Federal Reserve meeting this week has focused attention on likely future rises in interest rates.

"I think overall people are uneasy about holding bonds," he remarked.

"The decision by the Fed will definitely keep people away from bonds for a little while until we see a more clear picture."

While the Fed decision to hike rates is a foregone conclusion, market participants will be combing through the accompanying statement for hints as to whether the Fed will abandon its "measured" pace for gradual hikes.

Most likely, the Fed will address the issues of surging oil prices and the potential increase in inflation pressure, said the strategist.

"And the market will be paying a lot of attention" to both the decision and the statement.

Light volume in Asia

At the close of the Asian market Monday, trading was quiet as Philippines' paper underperformed, down one point from Friday's close.

A source said that there were good bids for subordinated debt from Korean banks but overall trading was slow ahead of the FOMC meeting.

The spread on Korea Development Bank's 5¾% bond due 2013 (A3/A-) narrowed five basis points to 75 basis points from Friday's close of 80 basis points over Treasuries.

The spread on Kexim's 4½% bond due 2009 (A3/A-) narrowed five basis points to 65 basis points from Friday's close of 70 basis points over Treasuries.

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