Spreads widen, liquidity thins; sukuk issues eyed; Islamic Development Bank bonds popular

By Christine Van Dusen

Atlanta, Dec. 16 - Sukuk issues received attention in the marketplace on a Thursday that featured some selling but mostly thinner liquidity and Treasury-related spread-widening for emerging markets assets.

The JPMorgan Emerging Markets Bond Index Plus spread was up about 11 basis points early in the day before finishing wider by 14 bps. Going against the grain, Argentina was tighter by 3 bps, and Venezuela was 10 bps tighter.

Meanwhile yields on 10-year Treasuries were at about 3.48% at midday in Europe before closing that session at 3.54% - higher than many targets set for 2011, a London-based trader said.

"That's not necessarily being driven by anything country-specific," said Nick Chamie, head of emerging markets research for RBC. "Quite simply, emerging markets bonds aren't quite keeping pace with U.S. Treasury yields, so we're seeing spreads move wider. Having said that, though, there really isn't a lot of flow going through. We're winding down."

Indeed, new issuance was at a standstill on Thursday.

"We remain a week or so from Christmas," the trader said. "January will be the true market test, when clients and dealers are much more active and the new issue market reopens."

Ivory Coast under pressure

In the secondary market, some trading was seen for Russia-based Gazprom's 2015 bonds, which came at Treasuries plus 365 bps and ended the European session at Treasuries plus 242 bps.

There was also "decent interest" in Qatari Diar's 2020s, which were seen at "just below the par level," the trader said. "Qtel International has had mixed flow so far."

He was looking to buy $1.7 million of Kuwait Projects Co.'s 2016 bonds at 107.25 and $1.5 million of Bahrain's 2020 bonds at 101.65 while seeking to sell $800,000 of African Export-Import Bank (Afreximbank)'s 2014 bonds at 112.25.

Market-watchers were also keeping an eye on Ivory Coast, which has seen more violence. In response, the sovereign's 2032 bonds were trading at 47 bid, 49 offered.

Otherwise, though, most of Africa was better offered, the trader said.

"There's some selling pressure and some repricing with rates," he said. "Even previously rock-solid Egypt has plenty of paper around.

Sukuks in demand

Sukuk debt, especially from lenders in the Gulf region, has seen returns climb to almost 16% so far this year, a market source said.

Among the sukuk issues of most interest on Thursday was the Islamic Development Bank's 3.172% bond due 2014, which was seen trading at 104.25 bid, 105 offered. The issuer's 1.775% 2015s were seen at 98.5 bid, 99.25 offered.

"This might be AAA, but wow - it just shows the tremendous demand for sukuks," he said.

The trader was trying to sell about $4 million of the issuer's 2015s at 99.25.

Also benefiting from the solid sukuk bid in the market was Dubai's 6.396% 2014 notes, which were between 5 bps and 8 bps tighter during the day.

"They're tighter once again, with the front end well supported," he said.

TAQA in focus

Another Middle Eastern issuer in focus on Thursday was Abu Dhabi National Energy Co. (TAQA), which was assigned an A long-term corporate credit rating from Standard & Poor's.

The rating is based on the fact that TAQA has support from its majority owner, the Abu Dhabi emirate.

"The street is short on most TAQA issues," said the trader, who was looking to buy $2 million of the corporate's 2019 bonds at 104.

All of this came against the backdrop of Dubai International Capital LLC's agreement with its creditors on new terms for the restructuring of about $2.6 billion ofdebt, he said.

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