Emerging market debt rallies on Fed chief's comments; Kazkommertsbank sells $150 million in notes

By Reshmi Basu and Paul A. Harris

New York, July 19 - Emerging market debt rallied Wednesday following dovish comments by Federal Reserve chairman Ben Bernanke, which the market interpreted as signs that the central bank is nearing the end of its monetary tightening cycle.

In the primary market, Kazakhstan's JSC Kazkommertsbank sold $150 million of 10-year subordinated loan participation notes (Baa3/BB-/BB) at par to yield 8 5/8% via Dresdner Kleinwort Wasserstein.

Emerging market debt extended its gains Wednesday, sparked by a rally in U.S. core financial markets.

In his testimony before Congress, Bernanke said that U.S. growth was moderating and inflation remained under control.

Sources noted that he also hinted that the Fed would be comfortable with core PCE inflation (Personal Consumption Expenditures) above 2%. The Fed's comfort zone falls within the 1% to 2% range.

However, Bernanke did not send a clear message as to how the Fed will act at its next meeting in August. Most investors are pricing in a hike and then a pause.

Nonetheless, his comments reassured investors that the end of tightening is near, which sparked a buying spree in U.S financial markets. The Dow Jones Industrial Average index shot up 212 points to close at 11,011.42. And the yield on the 10-year Treasury note fell to 5.05% from Tuesday's close of 5.12%.

All in all, it was a good day for emerging markets, noted a trader, who added that spreads were two basis points tighter on the day.

"The market rallied hard," he said.

However, this does not mean that the market will continue to tighten, he cautioned.

"The market is not fragile but it's not very decisive either," he observed.

He added that the Fed chief's comments helped build on the decent sentiment seen in the previous session. Tuesday saw the JP Morgan Global EMBI index narrow by 7 basis points at 209 basis points versus Treasuries, despite higher than expected producer price index numbers in the United States.

Furthermore, the Fed chief's comments Wednesday overshadowed the disappointing U.S. consumer price index data. The core index, excluding volatile food and energy, jumped 0.3%, topping expectations of a 0.2% increase.

Sovereign bonds scored gains across the spectrum as Brazil and Ecuador outperformed the market. During the session, the Brazilian bond due 2040 jumped 1.15 to 127.05 bid, 127.15 offered.

The Argentinean discount bond due 2033 gained 1.50 to 89.75 bid, 90 offered. The Ecuadorian bond due 2030 added 1.60 to 99.25 bid, 99.95 offered.

Elsewhere, the Russian bond due 2030 moved up 0.50 to 107.50 bid, 107.87 offered. And the Turkish bond 2030 was higher by 1.63 to 139.875 bid, 140.375 offered.

In other news, Brazil's central bank cut the Selic rate by another 50 basis points to 14¾%, as expected. This is the lowest level since the start of inflation stabilization in 1994, according to a market source.

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