Emerging markets mostly lower; KDB talks benchmark bond offering; Europe's gas fight still burning

By Aaron Hochman-Zimmerman

New York, Jan. 15 - Emerging markets were dragged under by equities through most of the session, but with the help of equities, credit mounted a late-day resurgence.

Trading ended flat to slightly lower, but the market waited to hear the latest news about a new batch of supply from the Korea Development Bank as well as Peru and Indonesia.

Russia and Ukraine continued to wrestle over which party is to blame for the gas shortage, while parts of Eastern Europe froze in the winter cold.

The European Union tried to mediate the spat, but most officials could only offer tempered optimism for meetings to be held in Moscow on Saturday.

From the major markets, sinking equities spiked volatility midday, but as equities climbed back to positive ground, volatility ended up by only 1.86 at 51.00, according to the VIX index. The index is a common measure of market volatility.

As a sector, emerging markets widened by 8 basis points to 696 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

KDB to issue benchmark

The Korea Development Bank announced that it will offer five-year dollar-denominated benchmark senior fixed-rate notes (Aa3/A/A+).

The deal was talked at 675 bps to 700 bps and is likely to price on Friday.

BNP Paribas, Deutsche Bank, HSBC, Merrill Lynch and RBS will act as bookrunners for the registered deal.

There is a put at par if there is any decrease in government holding of the bank.

Proceeds from the sale will be used for general operations, including extending foreign currency loans and repayment of maturing debt.

The KDB is a Seoul-based development lender.

"It really all depends on KDB ... how big the deal comes," a trader said.

Between $1 billion to $1.5 billion will likely be received well, but over $1.5 billion will cause some indigestion, he said.

The deal is talked near the spread of Treasuries plus 677 bps, where the bonds from the Export-Import Bank of Korea priced on Monday, but "Kexim has tightened 40 bps," he said.

"If [KDB] prices a $1 billion or $1.5 billion, the market will tighten and narrow the gap," he said.

Asian tone holding even keel

Elsewhere in Asian trading, the Philippines continued to outperform Indonesia, but the latter began to find traction at lower levels.

Despite the expectation of more supply, "there's been a lot of buying interest in Indo," he said. "It's cheap enough."

"It's probably enough to get people interested," he said.

The Philippine government bonds due 2030 slipped 1 point to 110 bid, 112 offered.

The Indonesian sovereign bonds due 2018 fell 3 points to 76 bid, 79 offered.

Generally, "I don't think the tone's that bad," he said on Thursday, after "it was pretty grim yesterday."

The market is not nearly as bad as last autumn when the investment-grade index traded in the high-600 bps range in October and in the 500 bps range in November, he said.

"Now it just doesn't seem that desperate for hedging," now that the market is "much more cash focused and the hedge funds are less active."

"Stuff's cheapened so much," he said.

Pakistan's bonds due 2017 were quoted at 35 bid, 40 offered.

Hitched to equities, LatAm rebounds

In Latin America, the tonal shift in the afternoon was based on the rumor that Bank of America Corp. would receive another round of relief from Washington, D.C., "so that's slightly a positive," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Levels did not rebound entirely, but equities were able to drag up credit far enough to diminish the amount of losses, he said.

Meanwhile, Peru was in discussions with the U.S. Federal Reserve as well as China's central bank in order to work out a currency swap to stabilize the sol.

It would be a smaller version of the arrangement the United States already has with Brazil and Mexico, Alvarez said.

Still, Peru is really looking to issue "longer-term paper," he said, but "longer duration paper is not going to fly in the current market."

Investors will give issuers leeway within "10 years, max," he said.

The sol was seen trading at 3.175 to the dollar.

Also in the sector, Argentina's 8.28% Argentine discount bonds due 2033 gave up 0.75 point to 33.5 bid, 34.7 offered, while the 7 1/8% Brazilian bonds due 2037 slipped 0.25 point to 105 bid, 106 offered.

The new 5.875% Brazilian bonds due 2019 were lower by 0.375 point to 96.375 bid, 96.875 offered.

Chavez's thumb on the scale?

In Venezuela, the legislature approved a measure that will abolish term limits for all of the country's elected officials.

The legislation cannot be enacted until it is passed by a popular referendum, which is expected in mid-February.

"According to the polls, he doesn't have the votes," Alvarez said, but that may not be necessary in the classic sense, he suggested.

"It's hard to fathom that he would try to run this through again if he were not going to cheat," he said.

Otherwise, "why try?" he asked.

The 9¼% Venezuelan sovereigns due 2027 lost 0.25 point to 58.25 bid, 59.5 offered.

More fuel for gas row

In emerging Europe, the gas shortage worsens with each day, especially for hard hit eastern European countries, which were not able to amass suitable reserves.

Germany chancellor Angela Merkel suggested that if Russia persists in its tactics of holding gas as a punishment directed at Ukraine, it may no longer be considered a reliable supplier of energy.

As a whole, the European Union announced that it will send representatives to Moscow in order to help broker a deal between Moscow and Kiev during conferences that begin on Saturday.

Meanwhile, Russian prime minister Vladimir Putin is scheduled to meet with Germany's Merkel individually on Friday.

Despite the crisis, oil prices still remained low and traded close to $33 per barrel.

Meanwhile in Turkey, discussion continued over an expanded pipeline network that will make Turkey and other parts of Europe less dependent on Ukrainian cooperation with Russia.

"We have good relations with both countries," energy minister Hilmi Guler said, according to the Hurriyet Daily News; "we can host a meeting for the solution of the problem if it is demanded."

Guler also said progress is being made in the Nabucco pipeline project, which is intended to connect the Balkans and Eastern Europe with the gas producers around the Caspian Sea.

Also, the Turkish central bank cut the overnight borrowing rate by 2% to 13% and the overnight lending rate to 15.5% from 17.5%, according to a release from the bank.

The cuts were designed to spur growth as the "latest forecasts suggest that ongoing problems in international credit markets and the global economy will last longer than previously envisaged," the bank said.

The lira was seen trading at 1.6205 to the dollar.

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