Emerging market prices dip on Greenspan's comments; Moody's knocks down Philippines

By Reshmi Basu and Paul A. Harris

New York, Feb. 16 - Emerging market prices slipped Wednesday as the market absorbed comments made by Federal Reserve chairman Alan Greenspan. But by the end of the day his impact was actually small as spreads tightened in trading.

"The market was quite soft in the early going," said Enrique Alvarez, Latin America debt strategist for IDEAglobal.

Prior to Greenspan's testimony, "the market started to pull off, meaning that there was some profit-taking going on or maybe some shorts being put on," said Alvarez.

The market was awaiting negative news from Greenspan but that never happened, according to Alvarez.

Greenspan told the Senate Banking Committee: "All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored."

"He didn't say anything that you could conclude was very new," Alvarez observed. "There is nothing that he said that was overly worrisome for the market.

"What he said essentially is that real fund fed rates are still low, which implies that we are going to continue to see gradual increases in fed fund rates but nothing more than that," commented Alvarez.

According to one buyside source, Greenspan is now applying his famous 1996 phrase irrational exuberance, used to describe the overvalued equities market, to the bond market.

He has said before that anyone who owns bonds did not care about losing money, commented the source.

"I thought it was arrogant of him. The Fed sets short-term rates. The market sets long-term rates. Long-term interest rates are basically a referendum on what they think the Fed is doing.

"For him to say that is wrong is arrogant," he said.

Greenspan's comments did little to shift the long-term outlook for monetary policy, said Alvarez.

"Given that, Brazil has performed relatively well. You only see a downside about a quarter of point at the most throughout the Brazilian curve on the day," said Alvarez.

"That's quite positive given in light of the fact that it was down about three-quarters, maybe one whole point at some point in time."

Brazilian paper was able to retrace some of its losses. In the early morning, the Brazil C bond lost 1/8 of a point to 102 3/8 bid. At the close, the C bond was only down 0.063 to 102.687 bid. The bond due 2040 lost 0.10 to 117.35 bid.

Ecuador, Venezuela rebound from losses

Overall, the market took time to digest the comments, but eventually credits such as Ecuador and Venezuela moved up.

Early on, the Ecuador bond due 2030 was quoted at 93.30 bid, down 0.20. The bond closed the session at 93.55 bid, close to unchanged. The Venezuela bond due 2027 was spotted at 102.80 bid, down 0.05 in the early morning. At the close, the bond was up 0.30 to 103.05 bid.

"The tone you are getting is that the higher beta credits seem to be attracting either short covering or a little bit more investment in the sector. It was pretty positive in light of what could have occurred potentially," said Alvarez.

"I think Greenspan is having a much more difficult time rattling the markets than he has before. "

The buyside source added that spreads tightened after Greenspan spoke.

"I think the market came in today [Wednesday] a little worried. He confirmed a lot of the stuff we feared, but basically we did okay," he remarked.

Overall, spreads on the JP Morgan EMBI+ narrowed two basis points to 354 basis points.

Philippines down on Moody's cut

But if Greenspan's comments had little impact, the market was caught off guard as Moody's Investors Service downgraded the country's debt rating by two notches. The market expected one notch, not two, said sources.

The buyside source welcomed the action, calling the two-notch downgrade an aggressive move.

"I'm negative. I'm not positive at all on the Philippines," said the source.

Moody's downgraded Philippine's long-term foreign- and local-currency ceilings and ratings by two notches to B1 from Ba2, citing high level of government and external debt. This made the country susceptible to shocks, even though the government has made efforts to enact fiscal reforms, the rating agency said.

Just Tuesday, BSP governor Rafael Buenaventura said he expected a one-notch downgrade, given the country's progress on fiscal reform.

At the close of the Asian markets on Wednesday, the long-end of the Philippines curve traded down ¾ point, according to a source. Afterwards, the paper appeared to have a decent day, with its spread widening only one basis point, according to the buyside source.

"It's really strong. We are about three-eighths off Tuesday's close, after being a point and a half lower, with a very weak [U.S.] Treasury market as a backdrop, said a trader.

"Approximately 25% to 35% has been short covering. The rest has been real-money buyers on weakness," he remarked.

"Two notches was a big negative surprise. But the resiliency, especially with Treasuries down quite a bit, is a testament to the technical picture in the Philippines.

"It has really changed for the better," he concluded.

By the end of the session, the bond due 2025 down was spotted down ½ point to 112¾ bid. The bond due 2009 quoted at 106¼ bid, down ¾ of a point.

Colombia sells $325 million equivalent bonds

In primary news, the Republic of Colombia priced an upsized $325 million equivalent of peso-denominated 10-year bonds (Ba2/BB/BB) at 99.41777 to yield 12 1/8%.

The buyside source played in the deal, which went very well.

"It was attractively priced. It was well run. Rather than doing a drive-by that day, they gave people two days to do their work and that allowed them to build a much stronger book than they would have otherwise," he said.

ABN Amro and Citigroup managed the sale.

Part of the allure of the deal was that it was denominated in local currency, which has become more attractive in light of the weak dollar.

"I'm not so negative on the dollar anymore," said the buyside source. "I actually have been underweight in my foreign currency holdings lately.

"It's like any market, people are overly pessimistic on the dollar."

The buyside source expects to see volatility for the dollar ahead.

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