Dubai Investments cancels deal; EM debt firms after Fed signals patience on rate increases

By Rebecca Melvin

New York, Jan. 30 – The emerging markets debt market firmed after a weaker start on Wednesday after the U.S. Federal Reserve held rates steady, as expected, and signaled more caution than previously regarding further rate tightening.

The iShares ETF based on J.P. Morgan’s emerging markets sovereign bonds moved up to a 108 handle after dropping to a 106 plus handle early in the day.

There was also a strong reaction in the broader financial markets with U.S. stocks gapping higher and rates dropping back after they had drifted higher earlier in the day.

The benchmark 10-year Treasury bond turned lower to 2.687% from 2.724% early Wednesday and compared to 2.712% on Tuesday.

The Federal Open Market Committee maintained its target range for the federal funds rate at 2¼% to 2½% and continues to view sustained expansion of economic activity, with strong labor market conditions and inflation near the committee’s symmetric 2% objective. But the committee also removed language regarding further gradual rate increases from the statement it published after this week’s policy meeting.

Emerging markets have seen strengthening in the secondary market since Fed Chairman Jerome Powell said Jan. 4 that the Fed could readjust interest rates if global growth slowed. But the primary market has been slower than usual this past month.

Emerging markets debt investors are concerned not only about slowing global growth and U.S.-China trade talks that will impact growth, but with high levels of debt that emerging markets credits have built up in the last couple of years and as well as upcoming maturities that have to be paid out, market sources say.

A deal on the primary calendar for the Middle East and Africa region was canceled on Wednesday, a London-based market source said, noting also that trading was subdued.

Dubai Investments Park Development Co. LLC’s planned five-year dollar sukuk was pulled due to the “availability of more attractive funding alternatives for refinancing their outstanding notes,” a syndicate source said.

“The issuer will continue to monitor markets and looks forward to re-engaging with investors at an appropriate time,” the syndicate said.

The Dubai-based development company had planned a benchmark-sized sukuk to be priced via subsidiary DIP Sukuk 2 Ltd.

In Latin America, although there have been pricings this week, including a $1 billion issue of 10-year notes for Ecuador, there are a couple of deals on the primary calendar that may hold off now until next week to price.

Chile’s Latam Airlines Group SA’s planned dollar-denominated notes (expected rating: //B+) was heard to be eyeing next week for pricing after three days of fixed-income investor meetings this week, and Mexico’s Credito Real SAB de CV Sofom ER was said to be monitoring markets regarding its planned dollar-denominated intermediate notes.

Meanwhile the Central & Eastern Europe region in particular has been very quiet in terms of new issuance this past month.

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