Thursday, 19 March 2009

Brazilian Central Bank Might Continue Aggressive Monetary Policy Front-Loading, Policy Meeting Minutes Suggest

The Banco Central do Brasil released its monetary policy minutes today. According to the document, The downturn has substantially gained momentum since the fourth quarter, making it more likely that inflation slows towards or below the target for this year. The impact of the crisis is making the scenario more adverse, and weak economic conditions will ''remain in place for a longer period of time.´´ This is a worrisome statement, because it means that, despite a possible depreciation of the real and other unfavourable shocks, the likelihood of deflation at the wholesale level is growing. Brazil is already in recession -- GDP will shrink easily by a couple of points in the first quarter. President Lula is considering easing the primary surplus target to free up more money for investment as tax collections will be below target by about $20 billion. He is just buying time, not avoiding the inevitable.

Now the question is, Will the next reduction be close to 100 or 150 basis points? Probably 100 points. That is what most analysts expect.

New Issuance -- Posco Bond Guidance at 9%, Sources Says

This is information on the Posco bond sale -- which was initially scheduled for the start of the week. The unexpected announcement yesterday by the U.S. Federal Reserve messed valuations and guidance for this and other bonds (the Panama case was a special one, with its size being cut and the republic getting hurt by a reduction in issuance-related cost savings.)

Issuer: Posco
Ratings: A1 (negative) / A (stable)

Tenor: Five year

Size: To Be Defined

Yield Guidance: 9 Percent +/- 5 Basis Points

Bookbuilding: Citigroup Inc. / Deutsche Bank AG /Goldman Sachs Group Inc. /HSBC Holdings Plc. /Merrill Lynch & Co.

Timing : Today

Israel Bond to Price Today After Violent Swings in Treasuries Caused by Federal Reserve Repurchase Decision

One good source told us that the bond transaction involving Israel will be priced today. The bookbuilding was suspended following the dramatic movement in Treasury yields that followed the announcement by U.S. authorities of a planned $300 billion in Treasury bond repurchases.

Price guidance on the 10-year bond was around 290 basis points above the equivalent Treasury yield ( ten year bond) a few hours before the Fed announcement. No indications were given on the direction of the new price guidance -- and I don't want to risk saying where the yield is headed for -- I have no freaking idea!

Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc. are handling the sale.

Colombia Swapped $1.8 Billion of TES Yesterday; Second-Round of Debt Exchange is Expected

Colombia, which in the past six years became the farm of President Alvaro Uribe, swapped yesterday $1.8 billion in domestic Treasury bonds, known as TES, to stretch out maturities through 2024 and avert billions of dollars in short-term debt repayments. More debt should be included in a second round of the swap. In the past six months, the government succesfully swapped over $4 billion of maturing bonds. Nice!

CAF Lends $100 MIllion to Ecuador to Help the Nation Cope With the Impact of the Credit Crisis

Corporación Andina de Fomento, the multilateral lender founded by the countries of the Andean region, approved a revolving credit line worth $100 million to Ecuador. The transaction will help ''ease financial stress stemmed from the impact of the current credit crisis,´´ CAF said in a statement. The borrower will be the nation's Corporación Financiera Nacional. No details on the credit line were disclosed.

Fed's Plan to Buy Longer-Termed Treasuries, Agency Debt Should Lead to Dollar Drop, Rising Stocks, Bond Markets Across Latin America

The Federal Reserve's decision to buy long-term Treasuries might be one of the most aggressive policy steps taken by U.S. policymakers during this crisis. This, apart from sparking much-needed momentum to debt refinancing, should lead to a weaker dollar, a narrowing of mortgage rates spreads and a decline in the 30-year Treasury bond yield, and leeway to refinance the U.S. fiscal deficit. Two analysts told us in e-mailed replies to questions that the move bodes well for Latin America -- as it might propel a rally in some of the region's most traded currencies (the Brazilian real, the Colombian and Chilean pesos, etc.) and set a stable, permanent floor to some stock markets.

The Fed wrote in its statement yesterday that, in order to ''provide greater support to mortgage lending and housing markets,´´ policymakers increased ''the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.´´ Moreover, ''to help improve conditions in private credit markets,´´ the Fed decided to purchase up to ''$300 billion of longer-term Treasury securities over the next six months.´´ The 30-year yield fell from 3.8 percent on Tuesday to around 3.5 percent at the end of yesterday's session.

Bloomberg News led its U.S. market wrap close this way on Wednesday:

March 18 (Bloomberg) -- U.S. stocks and Treasuries surged and the dollar tumbled after the Federal Reserve unexpectedly announced plans to buy $1 trillion of bonds in an effort to lower consumer borrowing costs and end the recession. The Standard & Poor’s 500 Index added 2.1 percent, extending its rally since last week’s 12-year low to 17 percent. Yields on 10-year notes dropped the most since at least January 1962 after the central bank said it will spend $300 billion buying Treasury debt and up to another $750 billion on bonds backed by government-controlled mortgage companies. The dollar sank the most against the euro since September 2000.