Treasuries weigh on emerging markets; EMBI-plus seen flat; guidance heard on quasi-sovereigns

By Paul A. Harris

St. Louis, June 8 - Emerging markets ended 5 to 10 basis points wider Monday in light trading, according to a trader who focuses on Asian bonds.

The EMBI-Plus index spread was 417 basis points late Monday, 1 bp wider on the day, according to Ideaglobal debt strategist Enrique Alvarez.

"LatAm debt moved lower with equities, but there was also a tinge of negativity from the U.S. Treasuries market," Alvarez commented, adding that during the session the yield on 10-year government paper hit a new high of 3.89%.

"That is stressing price action in the Latin American space," Alvarez said.

In the primary market, price guidance and timing surfaced on Korea Hydro & Nuclear Power Co. Ltd.'s benchmark-sized dollar-denominated five-year deal, as well as on the Central Bank of Bahrain's benchmark-sized dollar-denominated sukuk.

London trader sees better sellers

Emerging markets spreads were wider and prices lower late in the London afternoon, according to a trader who cited weaker global capital markets as the reason.

"We're seeing better sellers on light volume," the trader added.

Russia's 5% dollar-denominated bonds due in 2030 were at 98¼ bid, 98 3/8 offered, down from Friday's close of 99½ bid, 99 5/8 offered, the trader said.

"That's probably a case where those bonds are liquid and trade-able," the source added.

The new Russian Agricultural Bank 9% bonds due 2014 (Baa1//BBB), which priced at par in a $1 billion issue last week, had come off their highs, settling at 101¼% bid, 101½ offered, down ½ point on the day, the trader said, attributing the move to a little profit-taking.

Meanwhile a syndicate banker in London saw the new Russian Agricultural Bank paper even lower, at 100.90 bid, 101½ offered.

Quasi-sovereign deals talked

Price guidance surfaced on a pair of quasi-sovereign deals that are in the market.

Korea Hydro & Nuclear Power set price talk for its benchmark-sized dollar-denominated five-year notes (A2//A+) offer at the Treasuries plus 400 basis points area.

The deal is expected to price this week.

Barclays, Citigroup, Deutsche Bank and Goldman Sachs are the bookrunners..

Elsewhere the Central Bank of Bahrain set guidance for its benchmark-sized dollar-denominated sukuk at Treasuries plus 350 basis points.

The books remain open. The size of the offer remains to be determined.

The deal is expected to price on Wednesday.

Calyon, Deutsche Bank and HSBC are bookrunners.

Latin America sees some weakness

Latin American debt has been very resilient to the latest upswing in Treasury yields, Ideaglobal's Enrique Alvarez said Monday.

However against the backdrop of 10-year Treasuries rising half a dozen basis point in yield to 3.89%, there was some weakness in names from the region.

Mexico's 6¾% global bonds due September 2034 were at 101 bid, down ¼ of a point, Alvarez said.

Brazil's 8¾% global bonds due February 2025 were at 120¾ bid, also off ¼ point, as were Argentina's 8.28% discount notes due in 2033, which were at 46 bid late in the New York afternoon, Alvarez said.

Amid a tide of rising U.S. Treasury yields, the Ideaglobal strategist does not anticipate any potential issuers from Latin America testing the primary market waters.

"They probably want yields to stabilize before they try something because as yields rise buyers will likely be a little more gun-shy, and demand a little more spread," he remarked.

Asia also eases with Treasuries

Asian debt also succumbed slightly to the move in U.S. Treasuries, according to a New York trader who focuses on Asian debt.

Philippines, which has pretty much shrugged off the sell-off in Treasuries over the past two weeks, did finally come off on Monday, the trader said.

The Philippines' 9½% global bonds due February 2030 were at 125½ bid, 126½ offered, down a full point on the day.

Indonesia's 11 5/8% bonds due 2013 finished the day at 127½ bid, 128½ offered, down about ½ point.

Meanwhile in the realm of high quality, Korea's 4 7/8% bonds due in 2014, which had gotten as tight as 215 bps bid, 205 bps offered on Friday, were seen at 230 bps bid, 220 bps offered late Monday, the trader said.

Things tightened up in the last half hour of trading in New York, the source said, attributing the move higher Nobel Prize-winning economist Paul Krugman's comment that the recession in the United States could end this summer.

Spectacular performance

Monday's slight softness notwithstanding, there has been broad-based strength across the Asian curve, the trader asserted.

"There has been some spectacular performance on the high-grade side," the source said, pointing to the Hutchison Whampoa Ltd. 7 5/8% senior notes due in 2019, which priced at Treasuries plus 475 bps in a $1.5 billion issue in March.

"It's now trading 285 bid, 275 offered," the trader remarked.

Kowloon-Canton Railway Corp.'s 5 1/8% notes due 2019, which priced at Treasuries plus 195 bps in a $750 million issue a month ago, are now 125 bps bid, 115 bps offered, the trader said.

"The earlier Korean deals have tightened close to 400 basis points," the source said.

"The more recent ones have tightened 100 bps to 150 bps.

Accustomed to the noise

The nuclear test which took place in late May in North Korea, following another test in April, failed to sour the appetite of Asian investors who have positions in Korean debt, the trader said.

"If anything it has tightened," the source remarked

There have been days when Korea has widened in the United States on the news, the source said.

"Each time the U.S. market reacts with varying degrees of severity," the source remarked.

"And every time it has been a buying opportunity - at least that's the way the Asian market appears to view it."

Saber-rattling and power struggles

Although it's not easy to discern the strategic thinking that goes on in North Korea's capital, Pyongyang, the markets seem to perceive the recent round of nuclear tests as a combination of saber-rattling to the outside world while a power struggle may be taking place inside North Korea.

"North Korea is attempting to improve its bargaining position," the trader said.

However the perception in the market seems to be that North Korea is not crazy enough to take things to extremes."

Also, Kim Jong-il, the late president Kim Il-sung's son, is believed to be in poor health, and endeavoring to pave the way for his son, Kim Jong Un, to take over in his wake.

The situation could arise where it would take months or even years for the world at large to learn of Kim Jong-il's death, if and when that happens, the trader said.

"I'm pretty sure his dad was dead a number of years before they actually admitted he was dead."

China wants the status quo

In the political dynamics at play in north Asia, the party that least wants any dramatic shift in the status quo is China, the trader said.

"China wants to maintain the status quo because they don't want a lot of refugees.

"Neither do they want North Korea to be so provocative that it forces the hands of South Korea and the U.S., in which case China would feel compelled to act because it doesn't want U.S.-backed South Korean troops right on its border."

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