Emerging markets weaken with equities; Bndes prices $1 billion bonds; spreads generally wider

By Aaron Hochman-Zimmerman

New York, June 3 - Emerging markets stepped back from a rally footing in order to regroup on Wednesday.

The weakness in equities along with some expected profit-taking compressed bond levels but did not shake investors' generally positive tone.

Even the bonds of aggressively climbing Pakistan were held unchanged at 64 bid.

Many were distracted from trading by an unusually active primary market.

Brazil's Banco Nacional de Desenvolvimento Economico e Social priced $1 billion while other deals from every sector sat waiting in the pipeline.

Volatility climbed steadily throughout the session to end higher by 1.39 at 31.02, according to the VIX index. The index is a frequently used yardstick of market volatility.

As a sector, emerging markets widened by 11 basis points to a spread of 443 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors will demand to hold assets in emerging market debt.

Bndes prices $1 billion

Many deals were still waiting patiently in the primary, but Banco Nacional de Desenvolvimento Economico e Social pushed ahead of the pack as it priced a $1 billion 10-year bond (Baa3/BBB-).

The offering had been talked at Treasuries plus 300 bps to 310 bps.

HSBC Securities and Goldman Sachs acted as bookrunners for the deal.

Proceeds will be used for general corporate purposes.

Banco Nacional de Desenvolvimento Economico e Social is a state-run development bank.

Also from Brazil, Banco Cruzeiro do Sul saw little movement although its $1 billion two-year bond has already been talked at 9¾%.

Asia feels 'consolidative'

Meanwhile in Asia "it's definitely been consolidative," a trader said.

"There's been some selling in [South] Korea," he said, "and Indo as well."

New supply has crept into the market over the last few sessions, but the widening is really because "stuff has rallied a lot," he said, and the market "hasn't widened up that much ... it's still tighter than at the start of the week."

The new deals that are available from Korea Hydro & Nuclear Power Co. Ltd. and Korea Gas Corp. will likely have no trouble finding interest, but "it's all a question of pricing," he said.

The South Korean bonds due 2014 were seen at 240 bps bid, 225 bps offered.

Meanwhile in the secondary, Pakistan has been a consistent winner in recent sessions, but its rise was stunted on Wednesday, the trader said.

The Pakistani bonds due 2017 were quoted at 64 bid, 67 offered.

Also, the benchmark bonds from the Philippines and Indonesia both traded flat.

The Philippine sovereign bonds due 2030 were seen at 127 bid, 127½ offered, while the Indonesian government bonds due 2019 were quoted at 128 bid, 128 ½ offered.

ADB, IDB create $500 million fund

Elsewhere in the sector, the Asian Development Bank along with the Islamic Development Bank announced that they will establish a $500 million Sharia-compliant infrastructure fund, according to a press release.

The 12 members, which will have access to the funds, are Afghanistan, Azerbaijan, Bangladesh, Indonesia, Kazakhstan, Kyrgyz Republic, Malaysia, Maldives, Pakistan, Tajikistan, Turkmenistan and Uzbekistan.

"With increasing demand for Islamic finance by both investors and clients, we expect the fund to attract capital not only from the Islamic world, notably the Middle East region, but from a wide range of institutional investors all over the world," said IDB director of the country operations department for Asia, Walid Abdelwahab.

"Despite the tightening liquidity around the world, there is still a substantial amount of wealth and money investors are increasingly interested in putting ... to work in a way that complies with their faith," he said.

Emerging Europe flat

Desks in emerging Europe were kept busy by new issues from the Middle East to the traditional areas of Eastern Europe, a strategist said.

In Ukraine, the International Monetary Fund announced that it will lend a fourth tranche of 2.5 billion special drawing rights (SDR) or $3.9 billion worth of the IMF's major currency basket to Ukraine if the third review of the program is favorably completed in November, a press release said.

It had been expected that the IMF would lend Kiev SDR 750 million in August with a fifth loan of SDR 2 billion in November.

The next review of Ukraine's standby loan program is due in June, when the IMF will review a SDR 2.125 billion tranche, the release said.

Also in Lativa, the government was unable to sell any of the $40 million in short-term debt securities at Wednesday's auction, according to Riga's Nasdaq OMX stock exchange.

Many in the market expected a currency devaluation to follow.

The lat was seen trading at 0.502 to the dollar.

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