Worries dim, but some uncertainty remains; Latin America trades well; ADB, Malaysia price

By Christine Van Dusen

Atlanta, May 27 - Concern about the European economic crisis seemed to lessen a little bit on Thursday as bond issuers began to tiptoe back to the market and investor confidence improved slightly, market sources said.

Yields rose on the improved conditions, as well as on the news that the People's Bank of China was not concerned about its euro sovereign bonds and was not reviewing its holdings of such assets, market sources said.

"There's a massive rally and squeeze," a London-based trader said. "I can only assume it's caused by China saying they are not selling the euro or reducing their exposure. Spreads are 20 to 50 basis points better."

Still, emerging market bond trading overall was "kind of fragmented," a New York-based market source said. "It's a mixed bag. Some credits are trading well and others are not trading so well."

Argentina and Venezuela traded well, he said. "They're up a couple of points, but having said that, there seems to be some selling," he said. "The spending rally was met with selling, given the uncertainty of what's going on down there."

Brazil was trading "very, very heavy but still off a bit from yesterday's highs," he said. "It's been outperforming the last couple of weeks."

Mexico was unchanged but better on the day, "which is pretty remarkable considering the Treasury moves," he said.

Also strong on Thursday was the Philippines, Indonesia and Korea, he said. "Korea has tightened quite a bit, but they'd gotten hit pretty hard" by previous news of escalating tension between North Korea and South Korea.

But there's still some "uncertainty out there," he said. "We need less volatility and more stability and more sustainable gains in a three- to five-day period where things are calm and bonds aren't jumping around all over the place. There's just a huge lack of conviction by everyone due to the uncertainty in the world, which is sort of justified."

This uncertainty has translated to outflows from emerging markets bond funds, according to data tracker EPFR Global. For the week ended May 26, the funds saw outflows of $343 million, the first weekly outflow since Sept. 9, 2009.

"That is eye-opening," the New York source said. "We've been surviving on pretty big inflows."

Uptick in issuance

The day started out slow for new issuance, market sources said.

"There are no new issues to speak of yet," the London trader said at midday in Europe. "The market, and myself, are now quiet. I think we are both tired."

Things perked up a bit, though, as the day went on, with two bond issuers pricing new deals.

There was Philippines-based Asian Development Bank with $3 billion 1 5/8% global bonds due 2013 pricing at 99.626 to yield Treasuries plus 46 bps. And Malaysia priced its $1.25 billion sukuk issue of five-year bonds at par to yield 3.928%, or Treasuries plus 180 bps.

"There was strong demand" for the Malaysia bond, a Europe-based trader said.

But overall that deal was "pretty boring," the New York-based market source said. "I think they have an '11 bond maturing. Spreads are wider but absolute yield levels are probably in decent shape because Treasuries are lower. So net-net, in terms of absolute yield, are they leaving anything on the table? Probably not. There's a lack of paper. It will be well placed, but it's a non-event."

ADB sells global bonds

Asian Development Bank priced $3 billion 1 5/8% bonds due July 15, 2013 at 99.626 to yield Treasuries plus 46 bps, according to an announcement from the bank.

Daiwa Capital Markets, Goldman Sachs International, Morgan Stanley and UBS Investment Bank were the bookrunners for the global deal, which was the lender's second in the U.S. bond market this year. The first bonds were issued in February with a five-year maturity.

"The robust sponsorship from investors globally resulted in an oversubscribed book of around $3.3 billion," said ADB treasurer Mikio Kashiwagi, in a written statement.

About 46% of the bonds were placed in the Americas, 32% in Asia and 22% in Europe, the Middle East and Africa. About 63% of the bonds went to central bank and government institutions, 17% to banks, 14% to fund managers and 6% to other types of investors.

The Manila-based lender plans to raise about $15 billion from the international capital markets this year.

Proceeds will be used for capital resources and non-concessional operations.

Asian Development Bank is an international development finance institution based in Manila.

Malaysia prices sukuk offering

Malaysia priced a $1.25 billion sukuk offering due 2015 (A3/A-/) at par to yield 3.928%, or Treasuries plus 180 bps, according to an informed market source.

Barclays, HSBC and CIMB were the bookrunners for the Rule 144A and Regulation S deal, which was talked at Treasuries plus 180 bps to 190 bps.

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