Emerging markets lose steam; CAF files for dollar bond offering; Treasury spreads tighten

By Aaron Hochman-Zimmerman

New York, May 27 - Emerging markets felt the downward pressure of sliding stocks on Wednesday but were able to avoid the violent swings seen on the equity side.

Equities in the United States were thrown back to the beginning of Tuesday's rally by soaring Treasury yields, a trader said.

Even though risk tolerance was shaken, emerging markets were still tighter on the week with high-yielding sovereigns far in the lead, he said.

South Korea was subject to spread widening, which came as economic fallout from the underground nuclear blast set off by North Korea on Monday, followed by further missile tests.

A contingent of Pacific powers joined to collect data on the North's nuclear capability, which prompted Pyongyang to abandon the 1953 ceasefire agreement with Seoul.

The primary market was silent in Asia and emerging Europe, where Croatia is expected to bring a €750 million deal; however, in Latin America, Venezuela's Corporacion Andina de Fomento filed to bring a dollar-denominated offering.

From the major markets, equities sold off while volatility posted a steep climb of 1.74 to 32.36, according to the VIX index. The index is an often used gauge of market volatility.

Treasury yields ran off again on Wednesday leaving emerging markets 15 basis points tighter at a spread of 444 bps, according to JPMorgan's EMBI+ index. The EMBI+ calculates the amount of extra yield investors will demand to hold assets in emerging market debt.

LatAm leaders meet, CAF files

Latin America saw some selling, although spreads were tighter on ever-higher U.S. Treasury yields.

Meanwhile on the primary side, CAF announced plans to sell dollar-denominated bonds, according to a filing with the U.S. Securities and Exchange Commission.

Credit Suisse and Merrill Lynch will act as bookrunners for the registered bonds.

Proceeds from the sale will be used for general corporate purposes.

Corporacion Andina de Fomento is a Caracas-based development lender.

Elsewhere, leaders in the region met in Brazil to discuss the future of the Mercosur trade alliance and whether or not Venezuela would be included.

The Buenos Aires Herald reported that president Hugo Chavez reassured Brazil president Luiz Inacio Lula da Silva that the Venezuelan branches of Brazilian firms were safe from nationalization.

Both Uruguay and Argentina expressed their willingness to welcome Caracas to the bloc, but president Cristina Kirchner also said she would defend the interests of the holding company, the Techint Group, which lost its Siderurgica del Orinoco CA (Sidor) subsidiary to nationalization.

Asia rattled by nuke test

The nuclear and missile tests by the North Korean military sent a shock through the market that was not devastating but was "more worrisome today" than on Tuesday, a trader said.

"It definitely caused some selling," he said. "You have seen some weakness."

Spreads were between 15 bps to 25 bps wider, but "the recent profit taking does make sense," he said, especially in South Korea where spreads are 150 bps tighter in the last four weeks.

Korea Gas Corp. had a $500 million deal planned in the near term, but "stuff is going to be a bit different," the trader said.

"We've lost a little bit of the euphoria," he said.

The Korean bonds due 2014 were seen at 280 bps bid, 270 bps offered.

In Indonesia, the legislature approved a 1.55 trillion rupiah subsidy for biofuels in 2010, the Jakarta Post reported.

Still, as crude oil prices rise, many hope to increase the total size of the subsidy to 1.554 trillion.

Oil was seen trading as high as $63 per barrel.

The Indonesian sovereign bonds due 2019 were spotted at 124½ bid, 125½ offered.

Also in the Philippines, the government bonds due 2030 were seen at 124¾ bid, 125½ offered.

Emerging Europe trades flat

Emerging Europe remained busy at the trading desks as prices held reasonably firm on tumbling stocks.

In Russia, president Dmitry Medvedev spoke with South Korea president Li Myung-bak about the recent nuclear tests in North Korea, the Itar-Tass News Agency reported.

"Both sides noted that the North Korean nuclear test was an outright violation of the U.N. Security Council Resolution 1718 and ran counter to the norms of the International Law," the Kremlin stated.

However, other reports noted that foreign minister Sergei Lavrov said: "We must not rush to punish, just for the sake of punishment. We must uphold the nonproliferation regime, but at the same time not forget that the problem can only be regulated through the route of dialogue," RIA Novosti reported.

Meanwhile, representatives of Russia's Rosatom were in Cuba to renew nuclear projects for the first time shortly after the collapse of the Soviet Union.

Elsewhere in the category, Turkey plans to offer a series of economic incentives, said a message from the Undersecretariat of the Treasury to Turkish media, according to the Hurriyet Daily News.

Details of the plan were scant, but the Treasury will offer tax breaks to specific industries to help ease the economic crisis, the report said.

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