Pause continues ahead of Fed news; mandates eyed for Thursday; Africa spreads tighter

By Rebecca Melvin

New York, March 21 – Emerging markets remained on pause for a second day on Wednesday as market players awaited news from the Federal Open Market Committee meeting, which concluded a two-day policy meeting with a 25-basis-points interest rate increase and showed a willingness to pick up the pace of increases in 2019 and 2020 if warranted even though the pace for 2018 increases was left unchanged at a total of three.

The bank’s benchmark federal-funds target rate was lifted to the range between 1.5% and 1.75%.

“I think people are squaring up positions. It’s all about the dots and the conversations. We’re waiting to see what happens there,” a London-based trader said ahead of the rate decision.

The so-called dot plot showed officials expect a total of three rate increases in 2019, which was up from the bank officials’ previous forecast in December when two interest-rate increases were expected. The economic projections showed officials believe inflation will rise above their 2% target in 2019 and 2020.

“The economic outlook has strengthened in recent months,” the Fed said in a statement following the meeting.

U.S. stocks, which were little changed at late morning, ended the session lower. U.S. Treasuries extended losses after the announcement and first press conference of new Fed Chair Jerome Power, leaving the yield on the benchmark 10-year Treasury note up at 2.901%. The 10-year note had been trading at 2.89% and jumped to as high as 2.936% before settling back to 2.901%.

A market player in emerging markets said that activity on Thursday will depend on reaction to the Fed news but was expecting new issue announcements and pricings to resume. Among deals in the wings in the Central & Eastern Europe, Middle East and Africa region are Ukraine’s agro-industrial MHP SE group’s new up to $500 million eurobond with an eight- to 10-year maturity and Globalworth Real Estate Investments Ltd.’s euro-denominated debt securities under its €1.5 billion euro medium-term note program.

In secondary market dealings, spreads were generally “OK,” a market source said.

The Africa sovereign space bounced back from widening on Tuesday. Following widening of about 10 bps to 20 bps across the board, Senegal was 20 bps tighter on Wednesday, Ghana was better, and Kenya was 10 bps to 15 bps tighter, following generally oversold conditions on Tuesday amid some likely short-covering ahead of the Fed.

First Abu Dhabi Bank’s 3 5/8% five-year sukuk, which priced at the end of February, was seen at 99¼ bid, 99¾ offered, with the spread tighter about 2.7 bps since issue. The lender operating in the United Arab Emirates priced $650 million of the Islamic bonds with a yield spread of mid-swaps plus 95 bps.

Testing month

The emerging markets have been under some pressure in recent weeks, with a slower primary market and with many new issues struggling in secondary market dealings to remain above issue. Higher beta names like Bahrain have struggled, but there have been notable exceptions to the upside including Oman’s BankMuscat, which priced $500 million of 4 7/8% five-year notes at mid-swaps plus 230 bps on March 8.

Behind the testing was a combination of factors. “The investment-grade market has been heavy – less so high yield – and that has hurt cross-over guys. Liquidity has been light. It’s difficult to quote, and the markets have been choppy and whippy,” a trader said.

The trader noted the increase in funding costs with Libor up significantly since the beginning to the year to 2.27% from about 1.69% at the beginning of the year.

© 2015 Prospect News.
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