Emerging market debt slips on Fed's decision; AES El Salvador to sell $290 million in notes

By Reshmi Basu and Paul A. Harris

New York, Jan. 31 - Emerging market debt saw further consolidation on Tuesday on the back of the Federal Reserve's decision to raise short-term interest rates and the increased likelihood that the central bank will push ahead with more rate hikes.

In the primary market, electricity provider AES El Salvador Trust plans to issue $290 million of senior guaranteed notes due 2016 (Baa3/NR/BBB-) via Credit Suisse.

And Federation Tower Management JSC, a subsidiary of Russian real estate developer Mirax Group LLC, will begin marketing a $100 million offering of two-year eurobonds, putable after 12 months, on Thursday. The initial guidance is 9.5% to 9.8%.

Pricing is expected next week.

Bank Zenit is the bookrunner. Alfa Bank is the co-manager.

EM drops in initial reaction to Fed statement

As expected, the Federal Open Market Committee raised rates by 25 basis points to 4½%, its 14th straight hike. The statement accompanying its decision allowed for some maneuvering room for the new Fed chief Ben Bernanke, who was confirmed by the Senate Tuesday. Moreover, the statement signaled at least one more Fed hike.

That means that emerging market debt should see more volatility ahead of the Fed's next meeting on March 28 since the asset class is very over extended, remarked Enrique Alvarez, Latin America debt strategist for IDEAglobal.

He added that Latin America will be going back and forth between tracking an increasingly volatile 10-year Treasury note and the U.S. equity market.

At first emerging market debt had a knee-jerk reaction to the news, but then stabilized, according to sources.

"The Brazil '40s saw a sell-off right when it [Fed decision] came out," said a buyside source,

"A lot of investors might see this as maybe an end to the carry trade," remarked the source, as spreads between emerging markets and U.S. Treasuries are bound to narrow.

Alvarez noted that the carry trade has been clipped for some time now.

"The carry trade usually prices off Libor. With Libor essentially costly for some time now, we have been theorizing that most of the trading that has occurred probably does not have to do with overly leveraged positions because the carry is not there," he observed.

Additionally, the session started off with a weak tone as investors cashed out on the market's recent rally, noted the buyside source.

At session's end, the Brazilian bond due 2040 shed ¾ of a point to 129.10 bid, 129.15 offered. The Argentinean par bond due 2033 fell 0.55 to 89.15 bid, 89.55 offered. The Colombian bond due 2033 shed 1.30 to 136.50 bid, 137.30 offered.

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