Emerging market spreads tighten after rate hike; Pemex prices $1.75 billion perpetual; Turkey rebounds

By Reshmi Basu and Paul A. Harris

New York, Sept. 21 - Emerging market debt regained momentum following the Federal Reserve's move to hike short-term U.S. interest rates by 25 basis points even though the move was widely expected by the market.

Spreads were wider Tuesday morning but tightened after the Fed decision, said a buy-side source.

"In the beginning of the day the market was a little bit cautious," said a Latin American debt strategist at Refco EM. "We saw some profit-taking.

"After the interest rate event, we saw the prices going a little bit higher," he said.

"Even the increase in interest rates has not spooked the market this time."

Emerging market prices began to climb after the Fed's move. At 12:30 p.m. ET, the Brazil bond due 2040 was bid at 112.30. At 2:30 p.m. ET, the bond was higher at 113.05 bid. The 2040 finished the day at 114.20 bid, up 0.85 on the session.

In its third policy tightening this year, the Federal Open Market Committee lifted the fed funds rate to 1.75% from 1.50%. In its statement, the Fed repeated that rate increases would follow a measured pace.

"After moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction, and labor market conditions have improved modestly," the Fed said in the statement.

"After the Fed, things went a little haywire here," said a trader. "But EM is pricing up."

The trader added that the market had "a strong tone" and "better bids."

"Everything is pretty much on target. The Fed came in as expected," said the trader.

"There were no major numbers. With the [recent rating agency] upgrade in Vene and Brazil, the whole market is feeling good right now," he noted.

Pemex prices

Mexico's state-owned oil monopoly, Petroleos Mexicanos, sold $1.75 billion in a notably large and highly unusual perpetual bond sale.

"It gives a lot of credibility to the corporate world in Mexico and also to the sector," said the Refco strategist. "And shows the appetite investors have for higher yields in emerging markets."

Petroleos Mexicanos priced $1.75 billion of perpetual notes (Baa1/BBB-) at par to yield 7¾%.

Citigroup, HSBC and Merrill Lynch ran the books for the Regulation S deal

On July 22, Pemex priced €850 million bonds due 2016 to yield 195 basis points more than mid-swaps via Deutsche Bank and Dresdner Kleinwort Wasserstein.

Take defensive position, says strategist

Perhaps more important than the actual quarter point push Tuesday was the language of the FOMC's statement, according to the Refco strategist.

The statement said that the Fed will be patient and will slowly move rates higher if the macroeconomic picture in the United States allows it, he said.

"It doesn't come as a surprise to our region [Latin America] but it is giving support to prices because there is a perception that the U.S economy is slowing down.

"That gives the emerging markets an opportunity to offer some extra yield, some price support and some improvements in terms of fundamentals and corporates," he said.

"We've seen the world of corporates improve."

The ratings upgrade in Brazil has helped Brazilian corporates, he noted.

"We've seen an environment that favors investment in Latin America."

However, the Refco strategist advises that as interest rates continue to move higher, investors should take a defensive position as to where to invest.

"And you should try to pick up bonds that offer high coupons and, ideally, in shorter maturities.

"The lower part of the curve is expensive, so we see more and more investors moving a little bit higher to the middle part of the curve," he told Prospect News.

Turkey rallies as EU worries ease

During Tuesday's session, Turkey's debt rallied as investor concerns eased a bit about the impasse over the country's penal code reform.

Turkey's main opposition party has asked parliament to reconvene for a special session in order to pass a penal code reform package that is a must for joining the European Union.

Last week, prime minister Recep Tayyip Erdogan shelved the package after conservatives pushed to make adultery a crime. The European Union has denounced that measure.

"It seems that the Turkish are going to be a little more lenient on the adultery bill," said a buy-side source.

In trading Tuesday Turkey's bond due 2009 tightened seven basis points to 330 basis points.

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