EM sovereign bond spreads widen post Fed update; Ghana, Benin, Qatar Islamic Bank price

By Rebecca Melvin

New York, March 20 – Emerging markets sovereign bond spreads widened on Wednesday, moving back up into their current trading range – just as they were poised to break out of it – after the U.S. Federal Reserve indicated a more dovish mindset on monetary policy.

The J.P. Morgan emerging markets sovereign bond index, referred to as the EMBI global, closed at 368 basis points, representing a spread that was 7 bps wider on the day. That level was up from 361 bps at the open, which was the cusp of a 360-380 bps trading range that has stood for the better part of the year, a New York-based market source said.

The spread for investment-grade sovereign bonds was 5 bps wider on the day, and the spread for the high-yield sovereign bonds was 12 bps wider.

“The market had foreseen no more rates hikes, but there was some reaction to the implications for growth that that belies,” the source said.

The Federal Open Market Committee stood pat on rates and said interest rate raises this year are unlikely amid signs of an economic slowdown. The FOMC also said it would halt its balance sheet tightening policy in September. The news at the conclusion of its two-day policy meeting marked a shift from tightening policy had been in effect for three years.

Having downgraded U.S. growth, unemployment and inflation forecasts, the Fed policy makers said that the benchmark Fed funds rate was likely to remain at its current 2.25% to 2.50% for the rest of this year. Previously one interest rate hike was in the forecast, although markets were less convinced of that. On the heels of the Fed statement and press conference, in which Chairman Jerome Powell said it may be some time before the outlook for jobs and inflation calls for a policy shift, U.S. stocks turned mixed to lower and U.S. Treasury bonds jumped, sending the yield on the benchmark 10-year Treasury to 2.53%, a fresh low for the year.

Ahead of the Fed news, the Republic of Ghana priced $3 billion in three tranches of notes due 2027, 2032 and 2051. The $750 million of eight-year notes priced to yield 8%, the $1.25 billion of 13-year notes priced with a coupon of 8¼%. And the $1 billion of 32-year bonds priced to yield 8.95%.

The tranches saw strong demand as investors continue to seek out more yield.

“These are good reward for the risk, relatively speaking. It had IMF supervision in place, its been more transparent and it’s a known quantity,” a New York-based market source said of Ghana, noting that the sovereign has a yield curve over six or seven issues.

Also pricing on Wednesday were the Republic of Benin’s €500 million of 5¾% amortizing notes due 2026 for a 6% yield, or a spread of mid-swaps plus 580.2 bps, and Qatar Islamic Bank SAQ’s $750 million five-year sukuk with a distribution rate of 3.982% and yield spread 150 bps over mid-swaps. The financial services company is based in Doha, Qatar.

Now that the Federal Reserve meeting is out of the way, the expectation is that emerging markets will remain fairly steady in terms of new issuance and spreads, a market source said. “The changes in the next three to six months will be more of a second-order nature, more muted,” the source said.

The market has made strides this year so far, recovering nicely from a two-month slump at the end of 2018. But going forward, a continuation of flat, rangebound trading is expected. At this point, “there is no imbalance to put direction to the market although it’s still sufficiently constructive for EM sovereigns,” the source said.

© 2015 Prospect News.
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