Emerging market debt decouples from U.S. Treasuries; Temasek sells upsized $1.75 billion bonds

By Reshmi Basu and Paul A. Harris

New York, Sept. 14 - Emerging market debt prices moved up Wednesday during a lethargic session while the Republic of Colombia announced minimum prices for its buy back of $700 million of dollar- and euro-denominated bonds via a modified Dutch auction.

In the primary market, Singapore's Temasek Holdings Pte. Ltd. sold an upsized $1.75 billion offering of 10-year bonds (Aaa/AAA) at 99.403 to yield Treasuries plus 44 basis points.

The deal was upsized from $1.5 billion, an amount that was earlier increased from the original $1 billion size.

The issue priced in line with revised price guidance. Initial guidance had been set at 45 to 49 basis points more than Treasuries.

Goldman Sachs & Co., Deutsche Bank and Morgan Stanley were lead managers for the Rule 144A/Regulation S transaction.

Also coming out of Asia, Industrial Bank of Korea priced a $500 million issue of five-year senior unsecured floating-rate notes (A3/A-/A) at par to yield three-month Libor plus 33 basis points.

The interest rate came tight to the revised Libor plus 33 to 36 basis points price talk. Initially, the notes had been talked at a 34 to 37 basis points spread to Libor.

Credit Suisse First Boston ran the books. HSBC and Morgan Stanley were the joint lead managers.

Among upcoming deals, Russia's GazpromBank talked its benchmark-sized offering of 10-year senior unsecured fixed-rate loan participation notes at the mid-swaps plus 200 basis points area.

The issue is expected to price before the end of this week.

Citigroup and Dresdner Kleinwort Wasserstein are joint bookrunners for the Regulation S offering.

EM drifts higher in slow session

Emerging market debt continued to decouple itself from the U.S. Treasuries market Wednesday, as the oil story took center stage.

Higher oil prices Wednesday gave more credence to the scenario that the Federal Reserve will leave interest rates unchanged or halt the current monetary tightening campaign beyond September, which helped lift debt prices, according to Enrique Alvarez, Latin American debt strategist at think tank IDEAglobal.

"We're at all-time historic highs on a price basis here," he said.

"It's easy to spook the market a little bit higher because I think there are very few people willing to go beyond these levels. But again it doesn't take much to force them a little bit."

In recent sessions, sources have spotted the divorce of emerging market debt from Treasuries. Alvarez has also noted the trend. On Tuesday, he ran a correlation exercise between the Brazil bond due 2040 and Treasuries.

"Through there's been a really big spike in positive correlation in the last month, it's slowly coming apart," he said.

"The problem is that as Treasuries plateau, emerging markets seems to grasp for other factors because there seems to be so much cash moving around."

Meanwhile a trader described Wednesday's session as "very quiet."

"It was busy in the morning. And right now just not a lot going on," he said late afternoon.

He said that the earlier part of the session was driven by Colombia's announcement of target prices for its tender.

"The minimum clearing prices for the market shot above it," he said. "And then with Treasuries falling off, things started to get weaker.

"It's been relatively quiet," he observed.

During the session, the Brazil bond due 2040 was spotted up 0.85 to 120.00 bid. The Colombia bond due 2009 fell 0.11 to 97.888 bid. The Russia bond due 2030 lost 0.06 to 114¾ bid. The Venezuela bond due 2027 gained 1.10 to 111 ½ bid.

"Spreads are tighter again," noted the trader.

"A lot of prices are unchanged and Treasuries are down, so it'll be another all-time tights on the indices tonight [Wednesday]."

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