Emerging market debt sees thin volumes ahead of FOMC; Fitch upgrades Brazil

By Reshmi Basu and Paul A. Harris

New York, June 28 - Emerging market debt saw a better tone Wednesday led by Latin American names amid thin trading volumes, as financial markets await Thursday's rate hike decision by the Federal Open Market Committee.

The FOMC is expected to lift the federal funds rate by 25 basis points to 5¼%, which would make it the 17th consecutive hike since the Fed started to put the squeeze on monetary policy in June 2004.

Meanwhile Brazil saw a ratings upgrade from Fitch, which helped its sovereign debt gain momentum and lifted sentiment across emerging markets.

The ratings agency raised the ratings for Brazil, including the long-term foreign currency issuer default rating (IDR) to BB from BB-, the long-term local currency IDR to BB from BB- and the country ceiling to BB from BB-.

The decision is "a reflection of Brazil's much improved external balance sheet, and that the country has weathered rather well the latest storm for emerging markets in the global capital markets," said Roger Scher, head of Latin American sovereign ratings, in a release.

During the session, the Brazilian bond due 2040 added 0.40 to 121.70 bid, 121.85 offered.

Elsewhere, the Argentinean discount bond due 2033 was unchanged at 86 bid. 86.50 offered. The Ecuadorian bond due 2030 was higher by 1.25 to 95.50 bid, 96.25 offered. And the Venezuelan bond due 2027 was up 1.05 to 115.85 bid, 116.25 offered.

Turkey sees sell-off reprieve

Turkey continued to rally as investors have been cheering moves made by the central bank to shore up stability in the foreign exchange market.

In the last week, the expectation of higher global rates has redirected investors' focus to those credits that suffer from large current account deficits such as South Africa and in particular Turkey. Previously Turkey's spreads widened on concerns over its ability to access financing in a more risk-averse world. But on Tuesday and Wednesday, the country's external debt stabilized on the back of moves by the central bank to halt the sliding lira.

During Wednesday's session, the Turkish bond due 2030 added 0.88 to 133.125 bid, 133.875 offered.

On Monday and Tuesday, the central bank intervened to sell dollars, after raising key interest rates on Sunday. But sources warned that Turkey is still not out of the woods.

The recent sell-off has been more concentrated in the CEEMEA region (central Eastern Europe, Middle East and Africa), according to an analyst, who added that Latin America has been weaker via a contagion effect, but overall has "performed decently given the reduction in risk."

Over the last two weeks, spreads on the JP Morgan EMBI Global index has widened by 14 basis points.

But the source noted that this current market volatility has ushered in new strategies as investors are now focuing on differentiations across credit fundamentals whereas before trades were more spread-driven.

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