Emerging market plunges on risk aversion; Korea Midland Power sells $200 million 10-year bonds

By Reshmi Basu and Paul A. Harris

New York, March 7 - Emerging market debt tanked Tuesday as U.S. Treasuries marked new territory on increased risk aversion.

In the primary market, power company Korea Midland Power Co. Ltd (Komipo) sold a $200 million offering of senior unsecured fixed-rate notes (A2/A-) at 98.364 to yield 42 basis points more than mid-swaps.

The deal priced at the wide end of the revised price guidance. Guidance was tweaked to 40 to 42 basis points from the low 40 basis points.

Credit Suisse and UBS Investment Bank managed the Rule 144A/Regulation S transaction.

And the Republic of Hungary sold an upsized offering of ¥50 billion in seven-year Samurai bonds at par to yield 1.67% or yen Libor plus 10 basis points.

The deal was increased from ¥25 billion due to strong demand.

Daiwa Securities SMBC Co. Ltd. and Nikko Citigroup Ltd. were lead managers for the transaction.

Over to Asia, state-owned Penerbangan Malaysia Bhd. plans to issue a benchmark-sized offering of 10-year bonds (A3/A-) later this week.

CIMB, Deutsche Bank and Morgan Stanley are managing the Rule 144A/Regulation S sale.

EM down on external volatility

Emerging market debt extended its three-session losing streak on increased risk aversion. U.S. Treasury yields have shot up in previous sessions on concerns that both the European Central Bank and the Bank of Japan will be ending their loose monetary policies.

Tuesday's London session saw pressure on follow-through from Monday's Treasury weakness and that extended into the New York session, remarked sources.

However there was a difference. Monday's downturn was lead by Brazil and Mexico while Tuesday's sell-off was seen across the credit spectrum, noted a source.

A combination of weaker Treasuries, softer equities and lower commodity prices drove prices lower in both external and local markets.

And with Thursday's meeting of the Bank of Japan and Friday's release of non-farm payrolls in the United States, emerging market investors look to be focused on Treasuries for the remainder of the week, remarked sources.

But the market will also pay close attention to the conclusion of Brazil's Copom meeting on Wednesday. The central bank is expected to cut the Selic rate by 75 basis points to 16.50%.

With the various concerns, investors are taking this opportunity to cash in their recent gains, noted a trader, adding that investors are a little more cautious.

"I think the sell-off will be temporary. We had such a good run. It had to come down," he observed.

Traders described Tuesday's session as busy.

The JP Morgan EMBI Global Index was down by 0.60% while its spread over Treasuries widened 10 basis points to 202 basis points.

At 3 p.m. ET, the Brazilian bond due 2040 was quoted at 129.30 bid, 129.40 offered, down 1.20.

The Argentinean discount bond due 2033 was spotted down 1.55 to 96.70 bid, 97.05 offered. The Ecuadorian bond due 2015 was seen at 102 bid, 103.50 offered, down 1.75 while the bond due 2030 was quoted at 96 bid, 96.75 offered, down 2.10.

The Mexican bond due 2026 was spotted down 1.25 to 157.75 bid, 158.76 offered. And the Venezuelan bond due 2027 was quoted at 125.40 bid, 125.80 offered, down 1.70.

Nonetheless, one sellside source noted that over the past few years the asset class has seen episodes of prolonged sell-off during the first half of the year, typically towards the second half of April.

"Given the tightening of EM spreads in the past few months and the recent sell-off in UST, investors might be seeing this as a profit-taking opportunity. However, we will have to wait and see how the market performs during the rest of the week to determine if there's a trend in these movements," the source added.

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