Emerging market debt rolls ahead after Fed leaves rates unchanged; high beta credits higher

By Reshmi Basu and Paul A. Harris

New York, Oct. 25 - Emerging market debt staged a late afternoon rally Wednesday after the Federal Reserve left fed fund rates unchanged for the third consecutive time.

In the statement accompanying the Fed's decision, the Federal Open Market Committee said that inflation is under control and that the U.S. economy is expanding at a moderate pace. That sentiment jived with what the market has been pricing in, noted a market source.

"With no major changes on the external front, EM continued to move higher," he added.

In the absence of country-specific drivers and with an advance in U.S. stocks, the asset class continued to hum along, in particular high yielding names, noted a trader. Nonetheless, the trading day was described as quiet by market sources.

At session's end, the JP Morgan Global index was flat on a spread basis while returns were up by 0.32%.

Additionally, the long end of sovereign bond curves was up about ¼ point post the FOMC announcement, according to an emerging market analyst.

In trading, the Brazilian bellwether bond due 2040 gained 0.55 to 130.75 bid, 130.85 offered.

Meanwhile Venezuela saw additional support on a spike in oil prices. During the session, the Venezuelan bond due 2027 added 1.20 to 123.60 bid, 124 offered.

Also Ecuador continued to rally as poll results showed that radical leftist Rafael Correa is losing ground against market-friendly banana exporter Alvaro Noboa, according to a survey released Wednesday by polling firm Cedatos.

The country's richest man Noboa grabbed 49% of support compared to 34% for Correa, who has spooked Wall Street with his declarations of debt negotiations.

In trading, the Ecuadorian bond due 2030 moved up 1.50 to 100.50 bid, 101 offered.

And Ukraine saw its spreads narrow by four basis points as Fitch raised the outlook on the sovereign's BB- rating to positive, citing strong economic growth and political stability.

The market continues to be quite bullish amid the Goldilocks scenario, noted market sources. And that rally may easily extend until year-end. But as spreads on the JP Morgan EMBI+ index grind to 184 basis points over U.S. Treasuries - within striking distance of the record low - the question is how much more upside is left. And that has made some market participants cautious.

"I been skeptical on this market for months," added the analyst.

"How long before we trade inside U.S. Treasuries?"

Buenos Aires jumps in trading

In other news, the Argentine Province of Buenos Aires (B3/B+) saw its new issue trade up in the secondary.

"Very quiet today [Wednesday] across the board except for new Buenos deal, which has been extremely active, up nearly 2 points from issue price," noted the emerging market analyst.

In the previous session, the province (B3/B+) sold a $475 million offering of 12-year bonds at 97.417 to yield 9¾% via Merrill Lynch.

Napocor sells $500 million 10-year bonds

In the primary market, Philippines state-run National Power Corp. (Napocor) (B1/BB-/BB) priced a $500 million offering of 10-year bonds at par to yield 6.875% via Citigroup and Deutsche Book.

The deal was well received as the books were more than five-times oversubscribed, according to a market source.

The Republic of the Philippines will guarantee the bonds for the cash starved utility.

And Russia's VTB Capital SA (JSC Vneshtorgbank) set price talk for a dollar-denominated offering of senior floating-rate notes (A2/BBB) at three-month Libor plus 60 to 63 basis points, according to a market source.

The roadshow is scheduled to wrap up in London on Thursday, Oct. 26.

Barclays Capital, Deutsche Bank and JP Morgan are joint bookrunners for the Rule 144A/Regulation S offering.

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