Emerging market debt up as Fed surprises no one; Brazil, Turkey and Peru up; Mexico down

By Reshmi Basu and Paul A. Harris

New York, Dec. 14 - Emerging market debt moved higher Tuesday, as the Federal Reserve raised the federal funds target rate by a quarter percentage point to 2¼% and reiterated that tightening will continue at a "measured pace".

The statement was nearly identical to the Federal Open Market Committee's last statement on Nov. 10. The one noticeable change was the addition of "earlier" in the text.

"Output appears to be growing at a moderate pace despite the earlier rise in energy prices," according to the FOMC.

As the Fed packed no punches, emerging market debt pushed higher.

"Trading was pretty quiet before the number, then we kind of took off here after the Fed wanted to keep it at a measured pace," said a trader.

"We priced up. Brazil '40s priced up over a half a point. And EM followed along with that," he said.

For the trading session, the Brazil bond due 2040 added 1.10 to 117.10 bid. The Ecuador bond due 2030 gained a quarter of a point to 84¼ bid. And Venezuela's bond due 2027 was also up a quarter of a point to 103½ bid.

The Fed move was in line with Street expectations, but the market was waiting for confirmation, according to the trader.

"Everyone waited for it to happen and decided let's buy some bonds before year-end."

Elsewhere, Turkey rallied on news that the country and the International Monetary Fund have finished talks on a new three-year stand-by deal supported by a loan of $10 billion.

Turkey's bond due 2030 soared 1.87 to 141.62 bid.

Meanwhile, Russian finance minister Alexei Kudrin said Russia could start paying off its Paris Club debt early next year ahead of expectations.

The Russia bond due 2030 added half a point to 102 3/8 bid.

Paper from Peru well bid

In recent sessions, illiquid Peru has been well bid by investors.

"Peru is a very interesting story that has been developing for the past 12 months," said the Refco strategist.

"In terms of the current account and a balance of trade, they've been posting excellent numbers this year.

"They are exporters of copper and also the economy is highly dependent on the fishing industry, which has done very well.

"And the market for one reason or another ignored their fundamental numbers until about a month ago, when you saw all the upgrades by the ratings agencies.

"I'm not surprised that Peru is catching up with what we've seen with the rest of Latin America," he noted.

Mexico's industrial output slows

Weaker-than-expected industrial output in Mexico hurt its corporates Tuesday. New data showed industrial output grew 1.8% in October, the slowest pace in nine months.

"That put a little bit of pressure on the corporates," said a Latin America debt strategist at Refco EM.

Glass maker Vitros SA de CV and telecom company Telefonos de Mexico SA traded a little lower, he said.

"Innova was off by about a point. Vitro was down by half a point."

Innova is Mexico's largest pay-television provider.

Overall, the Mexico bond due 2008 lost 0.10 to 113.90 bid while the bond due 2033 fell 0.10 to 106.90 bid.

And looking ahead, the action of Brazil's Central Bank will set the mood for Latin America. The bank is expected to raise the current 17¼% Selic rate by 50 basis points Wednesday.

"Anything less than 50 basis points might be a surprise for the market," said the Refco strategist.

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