Latins rally then fall back on inflation jitters, Indonesia talks $1 billion, Land Bank coming with deal

By Paul A. Harris

St. Louis, March 22 - Emerging markets bonds sold off after the Federal Reserve's Federal Open Market Committee meeting Tuesday.

While the central bank surprised no one on Tuesday when it hiked its fed funds target rate by another 25 basis points, taking the rate to 2.75%, emerging markets players, keen to hear a reiteration of the "moderate pace" of rate increases, were instead reminded of the inflation menace, and Latin bonds sold off.

Although FOMC members seemed sanguine about the present state of the U.S. economy, they dropped hints that the Fed would be prepared to be more aggressive with regard to future rate increases in order to keep inflation under control.

Asserting that the U.S. economy continues to grow in spite of rising energy prices, the Fed said that "pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices."

An emerging markets analyst told Prospect News shortly after the Tuesday close that early in the session, before the FOMC meeting, mere anticipation of renewed "moderate pace" talk from the Fed actually kindled buying in recently droopy Latin paper.

A mini-rally

"The market was overly confident that we were going to get a repeat of the 'measured pace' terminology in the FOMC statement, and nothing besides that," an analyst told Prospect News.

"So you had an uptick that turned into a mini-rally early, going right into the FOMC pronouncement.

"When people initially read through the statement they felt that that expectation had been confirmed.

"At that point you actually had Brazil up over 1.5 points on the long end."

However with a more detailed examination of the Fed remarks, the source added, people began to scan for the exit signs.

"When they saw mentions of 'pricing power,' and insinuations of inflation, everything rapidly cooled," the analyst said.

"The 10-year U.S. Treasury went from 4.46%, which was the low [yield] of the day, all the way out to nearly 4.64% [one source spotted it at 4.625% at the Tuesday close].

"Latin America has reacted to that, basically."

The source spotted Brazil's benchmark 2040 bond 110.35 at 50.

"It eased nearly three points in the wake of the FOMC meeting, the analyst said. "It tried making its way into the 113 range just when the Fed was announcing everything. Then it declined rapidly."

Meanwhile the Brazil C bond, which earlier in the session had been seen at 99.81 bid, 100.19 offered, was quoted at 99.375 bid, 99.625 offered at close.

Elsewhere in early Tuesday trading Venezuela's global bond due 2027 was spotted at 100.25 bid 101.10 offered, up from 99.95 bid, 100.80 offered at Monday's close. However Venezuela got caught in the same downdraft that was blowing against the rest of the Latin paper, and closed at 99.05 bid, 99.50 offered.

Crude oil prices fuel volatility

The analyst went on to say that as far as Latin American paper is concerned, inflation scares driven by rising crude oil prices are likely to continue to create chop, at least over the near term.

And never mind a new issue pipeline.

"I think you absolutely have to look at crude oil for a lot of cues involving Fed policy going forward," the source said. "I think you are going to see volatility in prices. Short sellers are very much in control of the market.

"The case for lower prices in Latin America depends on whether or not dedicated investors are forced to liquidate.

"I doubt that happens. I think they are going to stay put. It depends on where the 10-year Treasury goes. If you see the 10-year take off beyond 4.65% you may see slight position adjustments. But at this point I don't think that's happening.

"And I don't think the pipeline can heat up at any point in the near future because the conditions are not there. You don't want to attempt to sell any new paper into a dipping market. Although risk aversion is not totally present in the market it is in the back of everyone's mind."

Indonesia to brave the waters

Meanwhile in Asia, Tuesday's session brought news of an on-again, off-again benchmark-sized sovereign from the government of Indonesia.

Indonesia's expected $1 billion global sovereign bond is talked at Treasuries plus 180 to 190 basis points, according to a market source, and could price as early as Wednesday.

Deutsche Bank Securities, UBS Investment Bank and Citigroup are bookrunners. Credit Suisse First Boston and JP Morgan are co-managers.

The notes are expected to come with a 10-year or 15-year tenor.

Indonesia's U.S. dollar-denominated 6¾% global bond due October 2014 eased a bit on the news. A market source spotted it at 100.0 bid, 101.50 offered, off slightly from 100.25 bid at Monday's close.

Elsewhere news emerged from an Asian corporate name.

Land Bank of the Philippines, the Philippines' fourth largest lender, is expected to sell up to $200 million of global bonds during April via Deutsche Bank Securities.

The bonds are expected to come with a five-year or seven-year tenor.

Among the Philippines' sovereign issues, two euro-denominated bonds were somewhat lower Tuesday morning. The 9 3/8% due July 2006 was spotted at 107.65 bid, 108.65 offered, and the 9 1/8% due February 2010 was at 109.75 bid, 110.90 offered.

Meanwhile the dollar-denominated long bond, the 9½% due February 2030, was seen holding steady at 97.75 bid, 98.75 offered.

Dominican Republic exchange before Easter?

According to a market source, the government of the Dominican Republic is attempting to resuscitate a stalled legislative session before politics there become swamped by Holy Week festivities.

Bond players are acutely tuned into whether the legislature will authorize a global bond exchange that has been sidelined by partisan skirmishing between the opposition-dominated congress and the administration.

The external debt authorization has already passed the lower house, and now just needs senate approval.

Meanwhile, finance minister Vicente Bengoa announced that solid fiscal results have enabled the government to pay down approximately $345 million equivalent of external and domestic debt - with 40% of that total going to pay down energy-sector debts.

"What's happening is that the opposition people decided to start digging into corruption allegations against the administration," the emerging markets analyst commented.

"The exchange is going nowhere right now. The political situation needs to be ironed out."

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