FOMC jolts markets amid incipient Latin bond market recovery
July 31, 2013
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 program.
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 10-year money.
“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 LatinFinance.
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 bond. LF