Emerging market debt slides with equities, Treasuries weakness; Kexim sells $1 billion equivalent

By Reshmi Basu and Paul A. Harris

New York, Feb. 7 - Emerging market debt slid Tuesday on the back of weak U.S. equities and U.S. Treasury markets.

In the primary market, the Export-Import Bank of Korea (Kexim) sold $1 billion equivalent of $600 million of notes due 2011 and €325 million of notes due 2013 (A3/A).

The tranche of 2011 fixed rate notes priced at 99.496 to yield 71.5 basis points more than Treasuries while the portion of 2013 floating rate notes priced at par to yield Euribor plus 24 basis points.

Barclays Capital, Citigroup, Deutsche Bank and Morgan Stanley managed the deal.

And AES El Salvador Trust sold a $300 million offering of 10-year senior guaranteed notes (Baa3/NR/BBB-) at 99.511 to yield 225 basis points more than Treasuries.

Credit Suisse was the bookrunner for the Rule 144A/Regulation S transaction.

EM down on profit taking

Emerging markets debt slipped Tuesday as both U.S. equities and Treasuries were driven down. Treasuries dipped in response to a disappointing auction of three-year Treasury notes.

The sale was described as "worrisome" by a market source, adding that the market was concerned by the "lack of foreign buyers."

The auction saw a weak bid to cover ratio of 2.03% and a median yield of 4.571%.

Furthermore, Tuesday's session saw the continuation of the inverted Treasury curve.

The market source added that there are two camps of thought as to what the inverted Treasury yield curve means. He said some believe that the inverted curve is a result of foreign demand for U.S. government bonds while others see it as pointing to a slowdown in the U.S. economy.

"EM will be paying close attention to the 30-year auction," he said, however, adding that the sale is "likely to go well."

On Wednesday, the Treasury Department will sell $13 billion of 10-year notes and then on Thursday $14 billion of 30-year bonds on Thursday.

Nonetheless, the poor showing in U.S. markets weighed on emerging markets, sources noted.

"Trading today [Tuesday] is down across the board in general," said a trader, who added that trading volume was "okay" with a mixed group of players.

"Things are probably on the day slightly wider. There's a bout of profit taking going on," he added.

Ecuador down on oil problem

News out of Ecuador also added to market angst. Petroecuador suspended exports after violent protests stopped oil flows.

A prolonged disruption would hurt fiscal accounts as well as impact liquidity at Petroecuador, remarked an analyst.

During the session, Ecuador's bond due 2015 slipped 1.50 to 102 bid, 102.50 offered while its bond due 2030 fell 1.40 to 97.50 bid, 98.35 offered.

At session's end, The JP Morgan EMBI Global Index recorded a 0.2% loss.

During the session, the Brazil bond due 2040 fell 0.70 to 129.25 bid, 129.45 offered.

Argentina, which has been the best performer this year, saw profit taking as well. Its component of the JP Morgan EMBI Index fell 1.2% while its spread widened by seven basis points over Treasuries.

The Argentina discount bond due 2033 slid 1.05 to 93.50, 93.85 offered.

Meanwhile, Russia and Turkey were around unchanged for the day. The Russia bond due 2030 shed 0.31 to 111.563 bid, 111.813 offered.

Elsewhere, Indonesia's component of the EMBI was tighter by five basis points over Treasuries.

In other development, the government of Colombia said it would prepay $580 million of "costly" external debt this year. It is unknown what debt instruments the country will target.

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