Emerging market debt off ahead of Fed meeting; price talk on Aries

By Reshmi Basu and Paul A. Harris

New York, June 28 - Emerging market debt suffered Monday, dropping in price on low volume ahead of the Federal Reserve meeting this week as investors waited for the verdict on interest rates.

"It's slow," said a trader. "We're sitting on the sidelines."

The JP Morgan EMBI Global index was down 0.43% during Monday's session. Its spread to Treasuries narrowed four basis points to 478 basis points.

Brazil saw its debt down on the day. The Brazilian bond due 2040 was down three quarters of a point to 91.6 bid while the C bond was bid at 901/2, down 0.125 in late trading. Brazil's component of the EMBI index was down 0.47%.

State-owned oil company Petrobras' bond due 2007 was at 108½ bid Monday, up a point from Thursday's 107½ bid, 1081/2.

And other Brazilian corporates were also slightly up from last week. Beverage producer and distributor AmBev saw its bond due 2013 at 105.65 Monday, up less than a point from Thursday's 104¾ bid, 105¾ offered.

And mining company Companhia Vale do Rio Doce's bond due 2007 was at 107.875 bid Monday, up about half a point from Thursday's 107¼ bid, 108¾ offered.

Interest rate expectation

The general consensus is that the Fed will announce Wednesday that short-term interest rates are going 25 basis points higher. However, anything other than that could send shockwaves into the market.

"It's been quiet and not a lot of volatility but everyone is expecting the same thing," said a buy-side source. "It's more like waiting for a piece of news than anything.

"I don't think the Fed could do anything to reassure the market. It can only do stuff to damage the market."

The buy-side source added that he has not changed his position in the last month.

"We're still underweight in the emerging markets. The markets seem to have stabilized and so has the U.S. high yield market so it's really a function of value. And at some point, the market is going to offer exceptional value."

Summer rally?

The market could go either way this summer, according to the buy-side source.

"We're either going to have a summer rally or a summer sell-off," the source said.

"You have one foot on ice and one foot on fire; on average you're just fine.

"It depends how the Fed tightens and how the market reacts to that.

The second part of the equation is how economic news develops on a per country basis.

"There doesn't appear to be any extreme pricing or position as far as fundamentals are in the market. But one day at a time," said the buy-side source.

Aries talk

A buy-side source said other than the potential issuance from Aries Vermogensverwaltungs GmbH, nothing much was happening as investors are in a wait and see mode.

Another trader added that investors had been selling Russia last week, because the "Aires deal came as a surprise to the market."

The financing is linked to Germany's collective Paris Club agreements with the Russian Federation and will raise funds from receivables held by the Republic of Germany.

Aries Vermogensverwaltungs is a special purpose company.

Price talk emerged Monday on the $250 million and €250 million three-part asset-backed bond deal (Ba2/BB+).

Price talk is six-month Euribor plus 300-325 basis points on a tranche of euro-denominated three-year floating-rate notes.

For the two fixed rate pieces, talk is 7¾%-8% on a tranche of euro-denominated five-year fixed rate notes and 9¾%-10% on the dollar-denominated 10-year fixed-rate notes.

Deutsche Bank Securities and Goldman Sachs & Co. have the books for the Rule 144A/Regulation S offering.

Russia down again

Russia's slide continued into Monday's session.

The Russia bond due 2005 was bid at 1051/4, down 0.062 in late trading. The bond due 2010 was down a quarter of a point to 107¼ bid. The bond due 2018 also fell a quarter of a point to 124¾ bid. And the bond due 2028 was bid at 143, down 11/2.

And during Monday's session, the Russian component of the EMBI index fell 0.46%. Its spread to Treasuries tightened five basis points to 300 basis points.

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