Rally breaks; Kowloon-Canton Railway prices $750 million; Venezuela sinks on nationalizations

By Aaron Hochman-Zimmerman

New York, May 11 - Emerging markets clearly broke with the rally momentum of the previous week on Monday.

Equities around the world performed similarly as investors were hesitant to take on new risk.

In the emerging market primary, China's Kowloon-Canton Railway Corp. drew the market's interest by pricing a $750 million bond at Treasuries plus 195 basis points.

In trading, Venezuela was damaged by more political risk as president Hugo Chavez threw the net of nationalization over more firms, specifically targeting the oil services sector.

The Venezuelan bonds due 2027 lost 2 points.

Meanwhile in the major markets, equities saw a skittishness in investors which pushed prices lower and volatility up by 0.82 to close at 32.87, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets were forced wider by 18 bps to a spread of 482 bps. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

Kowloon-Canton prices, Asia wider

Asian bonds were "slightly wider" on Monday, a trader said.

In primary news from the region, Kowloon-Canton Railway priced $750 million of bonds at a spread of Treasuries plus 195 basis points (Aa3/AA+/).

The deal came at the narrow end of talk for a spread of 195 bps to 205 bps. The amount fell within the expected size of $500 million to $750 million.

The 5 1/8% bonds sold at a price of 99.659.

Citigroup, Deutsche Banks and HSBC acted as bookrunners for the deal.

The Kowloon-Canton Railway Corp. is based in Hong Kong and holds a letter affirming the government's pledge to maintain ownership of the company.

The bonds did not make any large movements in the secondary, the trader said.

Meanwhile in Indonesia, the government has spent only 21% of the year's budget through April, the Jakarta Post reported.

The $21.1 billion was less than expected to combat the global financial slowdown, the report said.

"The government should accelerate its budget expenditure, otherwise the much-needed fiscal stimulus to the economy would not be effective," PT Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said in the report.

"Liquidity in the banking sector may be affected too, as the money resulting from the stimulus is always absorbed. This is not an ideal system for our economic recovery," he added.

The Indonesian bonds due 2019 gave back 2 points to 124 bid, 126 offered, while the sukuk due 2014 lost 1 point to trade at 113 bid.

In Pakistan, the UN has committed to deliver aid to the nearly 350,000 refugees who have fled their homes in the Swat Valley after the army and air force began full scale operations against the Taliban.

LatAm lower on headlines

Latin America spent Monday easing off recent highs, a syndicate official said.

"CDS widened out considerably," he said. "Cash bonds gave up quite a bit as well."

"Mexico held its ground," he said, but in Venezuela, bonds slipped as investors worried about another round of nationalizations by the government of president Hugo Chavez.

In the latest development, Chavez targeted the oil services sector including a subsidiary of Halliburton.

The government may soon take the Bank of Venezuela branch of Santander Investments, Agence France Presse reported.

"Due to the news," the 9¼% Venezuelan sovereigns due 2027 gave up 2 points to 64½ bid.

Fellow high-beta, Argentina, had bounded higher last week, but on Monday it fell in sympathy with the category.

The 8.28% Argentine discount bonds due 2033 lost 2¾ points to 36 bid.

Also in the region, Brazil's 11% government bonds due 2040 were seen at 130.1 bid.

South Africa on the road

South Africa announced that Barclays and JPMorgan will lead an upcoming dollar-denominated benchmark-sized offering (Baa1/BBB+/BBB+).

Standard Bank will act as co-lead manager for the registered deal.

The roadshow for the deal will begin on Wednesday.

Emerging Europe lower despite IMF

The International Monetary Fund favorably reviewed Ukraine in its first standby arrangement review and increased the size of the second tranche to $2.8 billion from $1.9 billion, according to the IMF's web site.

"There are two reasons to increase this next tranche: first, the government has already made good progress; and, second, the first review was delayed for so long that it only seems fair to partially advance the disbursement originally scheduled under the second review," said Ceyla Pazarbasioglu, head of the IMF mission to Ukraine.

Pazarbasioglu does not believe Ukraine will be able to balance its budget in the near-term.

"So, it makes sense to revise the program's initial target of a balanced budget, and we agreed with the authorities to a budget deficit of 4% of GDP in 2009," she said.

Pazarbasioglu also noted that Ukraine's stability is bolstered by its "comprehensive" social safety net, which as a percent of GDP is programmed to increase between 2008 and 2009."

Meanwhile, the IMF is also still expected to be in negotiations with Turkey.

Some market watchers have speculated that the new standby arrangement may be as large as $25 billion to as high as $50 billion; however, Turkey priced a $1.5 billion 10-year bond on April 30 to yield 7.6%.

The Turkish sovereign bonds due 2030 sank 2 points to 148 bid.

Also in emerging Europe, Russia's government bonds due 2030 lost ¼ point to 100 1/8 bid.

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