Emerging market debt unmoved by Fed move; pessimism increasing over Argentina's debt swap

By Reshmi Basu and Paul A. Harris

New York, Feb. 2 -Emerging market debt appeared unfazed after the Federal Reserve pushed interest rates higher by an expected quarter of a point and kept its "measured" wording.

The Federal Open Market Committee raised the federal funds target rate for the sixth straight time. Rates have not been this high since October 2001.

After the decision, the market did retrace earlier losses from the morning, said a trader. But there was very still little afternoon volume, he added.

"It kind of rallied a little," he said. "It pretty much tracked Treasuries. After the Fed, Treasuries popped up a little bit."

The price on the 10-year U.S. Treasury note fell slightly 1/32 at 100 28/32, leaving yields virtually unchanged.

"Brazil followed along - we priced up maybe 3/8 of a point - nothing major. But we are closing at close to the highs of the day," the trader remarked.

Nonetheless, emerging market debt had "absolutely no" reaction as it saw the Fed action as a foregone conclusion, according to Enrique Alvarez, Latin America debt strategist for think tank IDEAglobal.

"No activity, no volatility. Brazil '40s were about 115.25 mid-market,' he said.

Alvarez quoted the price at 115.10 bid, 115.15 offered in late trade.

"They moved 10 basis points, which is negligible, essentially."

"If you look at Treasuries, they were around 4.14% before the announcement. And they are still sitting at 4.14% - a complete non-event." Alvarez added.

Overall, the Brazil bond due 2040 did recoup some earlier losses. It was quoted at 114.85 bid at late morning.

Meanwhile the Ecuador bond due 2030 closed at 92¾ bid, down 0.30. The Mexico bond due 2009 was bid at 121.40, down 0.10. The Venezuela bond due 2027 fell 0.80 to 101½ bid.

The market had already discounted at 25 basis point hike. Instead, the market was more focused on the FOMC statement, and whether there would be any alterations to the language, noted Alvarez.

"And the statement is essentially a replica of the last statement we had in December. There is absolutely nothing new on the Fed front as far as policy accommodation removal or change in speed in policy accommodation removal."

Attention will now turn to Friday's release of U.S. non-farm payroll numbers as well as what the G7 has to say. Investors will be looking for comments relating to the health of the U.S. dollar at the G7 meeting, according to Alvarez.

Pessimism over Argentina's debt swap

There is increasing skepticism about how successful Argentina's $102.6 billion swap of new bonds will be. The country opened its exchange offer on Jan. 14 and it ends on Feb. 25.

Figures released last Friday showed that only 26% of investors had accepted Argentina's proposal.

"There are rumors in the market that the Republic of Argentina is purchasing, through Argentine banks, defaulted bonds in order to reach the 40% minimum required by Friday (Feb. 4), in order to make the "canje" (exchange) feasible, said a source.

The market has definitely grown pessimistic about the final participation levels, said an emerging market analyst.

"The government may do some buying to add 5% - 10% or so to the participation number, but even with the government propping the deal up it still looks like Argentina will be lucky to get more than 60% participation.

"As long as the bondholder groups stick together, investors will maintain the upper hand. So far, it seems like the bondholder groups are being more successful at keeping their members from tendering than a lot of people had expected," he added.

Meanwhile, Standard & Poor's said it expects to raise Argentina's foreign debt to B- from SD selective default, following the completion of the debt exchange.

At session's close, the Argentina bond due 2009 traded down three quarters of a point to 30¼ bid.

S&P upgrades for Indian corporates

Indian corporate names tightened five to 10 basis points following Standard & Poor's upgrades at the close of Wednesday's Asian market, said another source.

The ratings agency lifted ratings for the Indian sovereign, SBI, and ICICI to BB+.

Spreads for Indian bank narrowed five to seven basis points on the news.

The ICICI bond due 2009 (Baa3/BB) tightened five basis points to Treasuries plus 105 from Tuesday's 110 basis points.

Meanwhile, Korea wants to hit the capital market in April or May, said Choi Joong Kyung, the director general of the ministry of finance and economy. The government is considering doing a debut euro-denominated issue this year, according to one market source.

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