FOMC jolts markets amid incipient Latin bond market recovery
As Latin borrowers stage a halting return to raising debt in US dollars, Wednesdays’ FOMC statement means “red lights” for EM, analysts say
The US Federal Reserve’s
statement Wednesday, which comes as Latin borrowers stage a
halting return to dollar issuance, means "red lights are
flashing" for global emerging markets, analysts at
Société Générale say.
The Federal Open Market Committee (FOMC)
said it would continue buying assets at $85 billion a month
through the QE program, and reinvesting the interest, to put
downward pressure on long term interest rates.
SocGen analyst Benoit Anne said markets
would likely be stressed on Thursday, after the Fed maintained
a "steady message" on exiting its quantitative easing
Not everyone agreed, though. Analysts at
Bulltick Capital Markets said the statement sharply altered the
expected timing of the QE tapering.
"The Committee recognizes that
inflation persistently below its 2 percent objective could pose
risks to economic performance, but it anticipates that
inflation will move back toward its objective over the medium
term," the Federal Reserve says.
Bulltick analysts said the statement
"reduces materially" the possibility that the Fed would begin
cutting its monthly bond purchases in September, as had been
anticipated by investors after previous FOMC statements.
"This is a very dovish phrase, not least
because core inflation [and Personal Consumption Expenditure
rate] will most likely remain below 2% year on year for a very
long time," Bulltick says.
Latin return threatened
The news comes as Latin companies staged a
tentative return to US dollar bond markets. Opportunity to sell
bonds in dollars slimmed rapidly at the end of May, when yields
on US Treasury bonds rose in anticipation of tighter US
monetary policy and, ultimately, higher interest rates.
The 10-year US hit a post-crisis high of
2.73% on July 5, although it since traded tighter and closed
Tuesday at 2.63%.
Bermuda was the latest Latin American borrower to borrow in
dollars, selling a $750 million 2024 bond issue Tuesday. It
pays a yield of 225 basis points over US Treasuries for the
"This is the cheapest funding they will
get because interest rates are going up and its credit ratings
are going down, so why not issue as much as possible," Carl
Ross, managing director of investments at Oppenheimer, told
Odebrecht reopened the dollar market for Brazilian
corporates earlier this week. It sold a $1.69 billion
drillship securitization yielding 6.75%. Earlier in the month,
Pemex took advantage of a rally to sell a $3 billion, triple-tranche