Emerging market debt takes a break from sell-off; SK Corp. sells $300 million 2012 notes

By Reshmi Basu and Paul A. Harris

New York, May 16 - Emerging market debt saw a reprieve from its recent string of declines in Tuesday's session as spreads narrowed on the back of a more supportive U.S. Treasuries environment.

In the primary market, South Korea's SK Corp. priced a $300 million issue of 5 7/8% six-year senior notes (Baa3/BBB-/BBB-) at 98.908 to yield 63 basis points more than mid-swaps.

Price talk was for a yield in the mid-swaps plus mid-to-high 60 basis points area.

Korea Development Bank, Morgan Stanley and UBS were joint lead managers for the Regulation S issue.

EM a tad higher

Emerging market debt saw spreads narrowing Tuesday, as the yield on the 10-year U.S. Treasury note fell to 5.11% from 5.16% on Monday.

U.S. Treasuries gained after the government reported a surprisingly sharp decline in home starts in April, which the market interpreted as a sign that the U.S. economy is decelerating. Also adding support, core producer prices rose a benign 0.1% in April, an indication that inflation is under control.

As a result, emerging market debt and the foreign exchange market gathered some momentum.

Major EM currencies, such as the Brazilian real and the Turkish lira retraced losses from the previous session, according to a market source. The real gained 1.6% versus the dollar while the Mexican peso and the Colombian peso rallied 0.9% and 0.7%, respectively. After being down by as much as 5% on Monday, the Turkish lira gained 3% against the dollar.

At session's close, the JP Morgan EMBI Global Diversified index was posting a 0.5% gain while spreads narrowed by three basis points versus Treasuries.

"I think there's some profit-taking on shorts going on today [Tuesday] here, especially after the PPI and housing data convinced a lot of people that the day of reckoning isn't upon us," said an emerging market analyst.

Welcome technical correction, says buysider

A buyside source added that the recent sell-off was "a welcome technical correction that was warranted after a strong rally." Furthermore, the source added that she would wait for more of a correction before she buys on dips.

Meanwhile another market source observed that real money accounts appeared undeterred by the spread widening seen in the three previous sessions.

"Real money accounts aren't seeing redemptions yet, and until they do I doubt that we'll see much more serious selling," noted the analyst.

However, Wednesday's session could see a turn for the worse if the U.S. consumer price index comes in higher than expected. Market consensus expects the headline CPI to increase by 0.5%.

"I do think that bad news from CPI could spook the market and send EMBI+ spreads north of 200bp, but even then I think it should be contained in the very short-term," noted the analyst.

"The lack of significant selling in high-yield and investment-grade corporates in recent days suggests that there's not yet any generalized panic about credit."

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