LatAm trades ‘sideways’ as market mulls Fed rate hike, IMF’s boost of funds for Argentina

By Rebecca Melvin

New York, Sept. 26 – Latin America debt traded flat to lower on Wednesday with parts of the emerging markets debt market a bit stronger as the U.S. Federal Reserve raised its target interest rate as expected by 0.25% to 2.25%.

The U.S. central bank said that it expects to continue a path of gradual rate raises, with one more expected this year and three increases expected in 2019.

In addition, Argentina and the International Monetary Fund announced that a revised agreement had been negotiated which increases total funds and increases the amount of near-dated disbursements, a New York-based market source said.

The Argentina-IMF news came late in the day, so markets had not had time to react, but it looked like the adjustments in the agreement are positive, the market source said.

“LatAm credits traded sideways today. I would describe low-beta names unchanged, and high-beta names were about 50 cents to a point lower in price” as investors awaited the Fed announcement, the market source said.

Low-beta names include sovereigns such as Chile and Mexico.

The tight policy stance is projected to stay level through 2021, the time frame of the Fed’s latest economic projections. In addition, a long standing reference to monetary policy being “accommodative” was removed from the Fed policy statement. The term has been an ingredient in the Fed’s guidance for the past decade, and its removal means the Fed now considers rates near neutral.

U.S. Treasuries gained and U.S. stocks slipped on the Fed decision, which came at the conclusion of the Federal Open Market Committee’s two-day policy meeting.

“The market sees this as dovish, or that the Fed describing its current Fed Funds level as being neutral or close to neutral, is building room to eventually start cutting rates if and when the economy takes a turn,” the New York market source said.

“It is yet to be seen how far up into neutral territory the Fed wants to go. In the statement following the decision, Powell described the policy as ‘still accommodative,’ creating a bit of confusion,” the source said.

Fed Chairman James Powell answered questions following the conclusion of the meeting. He described risks as roughly balanced, and the latest projections show the economy continuing at a steady pace through 2019, with U.S. gross domestic product growth seen at 2.5% next year before slowing to 2.0% in 2020 and to 1.8% in 2021.

The rate hike was the third for this year and the seventh in the last eight quarters.

Meanwhile, Argentina and the IMF announced an updated agreement in which the overall aid program was increased by $7 billion to $57 billion and disbursements for 2018 and 2019 increased to an additional $8 billion in 2018 and $11 billion in 2019.

“Importantly, some of the conditionality is removed from the disbursements, and Argentina will be able to access the funds for budgetary purpose as long as the economy is meeting the agreed targets,” a market source said.

Argentina’s bonds, which were weaker on Tuesday, had not yet reacted to the IMF news. “But I think this is overall positive for the market,” the market source said.

In the primary market, Honduras’ Banco Atlantida SA was in focus regarding whether market conditions are strong enough for it to price its proposed five-year senior unsecured notes (expected ratings: /BB-/B) for up to $350 million.

Fixed-income investor meetings were wrapping up on Wednesday, meaning Thursday would be the likely time for the deal to price, a New York-based market source said.

If Atlantida prices, “it will set up a good precedent and tell us what the market tone is. If it doesn’t, it could push us back again another couple of weeks,” the source said.

“It has been pretty quiet, quieter than I would have thought,” the source said, regarding issuance for the Latin America region for September.

Atlantida is a financial group based in Tegucigalpa. It was last in the market in July 2017 when it priced $150 million of 8¼% five-year notes due 2022.

The Fed as well as the Brazilian elections were seen as large factors in determining tone in the Latin America debt primary market.

© 2015 Prospect News.
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