Emerging market debt gains on Fed statement; Philippines' VAT delay pushes back new issuance

By Reshmi Basu and Paul A. Harris

New York, May 3 - Emerging market debt moved up Tuesday in response to news that the Federal Reserve would continue with its "measured pace" of interest rate increases.

As predicted, the Federal Open Market Committee raised rates by a quarter of a point to 3%. For the most part, the FOMC's accompanying statement remained the same except for a noteworthy omission from the original text. The Fed had left out a sentence regarding inflation expectations. The market interpreted that as "more hikes to come," said a market source.

Almost two hours after the original release, the Federal Reserve revised the text to add: "Longer term inflation expectations remain well contained."

That gave a relief rally to U.S. Treasury markets. The yield on the 10-year note stood at 4.16% at the end of the session, down from 4.19% before the news.

Emerging market debt was also stronger Tuesday. The JP Morgan EMBI+ index added 0.36% while its spread to Treasuries narrowed by six basis points to 389 basis points.

"Overall, they [Federal Reserve] are still going to go at a measured pace," said a trader.

"They are not going to raise the rates too quickly here. Things will be okay for EM.

"The technicals are still good in our market. And we still have some room to grow here," he added.

Right after the statement, there was a little bid, said the trader.

"We were up. We were down. We are pretty much right at the level pre-Fed announcement," he said.

There was strong buying in the morning and early afternoon, said the trader. But he also noted that there was strong selling as well.

During Tuesday's session, the Brazil C bond added 3/8 of a point to 100 1/8 bid while the bond due 2040 gained 1.40 to 114.65 bid. The Russia bond due 2027 moved up ¾ of a point to 107 bid. The Venezuela bond due 2027 climbed 1.40 to 100¼ bid.

The traded commented that "real money" was still absent from trading activity after the Fed statement.

"I think guys are going to go home tonight and re-evaluate. We'll see what happens tomorrow [Wednesday]."

But the market may still be on hold as it awaits Friday's release of non-farm payroll numbers in the United States, he said.

"We will have to reassess after the employment data on Friday," added the trader.

Philippine's faces VAT delay

One market source told Prospect News on Tuesday that the Philippines is poised to start marketing its second international bond offering of 2005 - but is waiting for the legislature's passage of the anticipated value-added tax reform legislation.

However approval of the value-added tax bill has been delayed and there is uncertainty over how the revisions to the VAT law will pan out.

The Senate and Congress panels remain at odds on a proposal to raise VAT to 12% from 10%, with the Senate opposed to raising the tax.

President Gloria Macapagal-Arroyo is pushing for a 12% VAT rate, which the House of Representatives adopted.

Earlier in the year, the Philippines priced $1.5 billion of 9½% notes due 2030 and the Asian nation is expected to return to the international bond market with an additional $4 billion by the end of the year.

However an emerging markets sellside source told Prospect News that a new sovereign bond from the Philippines is probably not imminent.

"The Philippines has a tendency to take forever to increase taxes," the source said.

"Also, everyone in Asia thinks their market is effectively closed this week because of Golden Week, although I don't really think that impacts names like Philippines."

Gazprom may not need bond sale

Russia's plans to merge Gazprom and Rosneft into a state oil and gas company may have been called off, as disagreements between the government and company officials have escalated, according to local media reports.

Local papers are reporting that the Russian government may opt to pay cash to Gazprom to secure a controlling stake in the company and forsake the Rosneft merger scheme, according to a market source.

A cash sale would most likely remove the need for a hefty new issuance of bonds from Gazprom and likely push the ratings agencies to bring Gazprom's rating into line with Russia's sovereign rating, said the source.

The government's options to raise its stake in Gazprom included a straight merger with Rosneft/Yugansk and a merger with Rosneft only.

A merger with Rosneft/Yugansk raised the problem of refinancing more than $10 billion of Rosneft debt and servicing Yugansk's defaulted loans and tax liabilities.

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