Global worries sideline emerging market investors; Korea's SK Telecom prices

By Reshmi Basu and Paul A. Harris

New York, March 23 - On Tuesday, emerging market bond trading stalled as wary investors stayed on the sidelines in the wake of increasing geopolitical concerns.

Israel's killing of the Hamas founder, Sheik Ahmed Passim, has intensified investors' concerns over increased terrorist attacks.

Nonetheless, Korea's largest cell phone provider SK Telecom Co. priced $300 million of seven-year bonds (A3/A-) at 99.271 to yield 4.372%.

Credit Suisse First Boston and Citigroup were the bookrunners on the Rule 144A/ Regulation S issue.

Proceeds from the notes will be used to refinance debt.

Silence on the trading floor

Tuesday's trading was locked in sleep mode, according to fund manager.

"There's no new news coming out, "said one fund manager. "Most of the market is really quiet. There is really nothing going on."

The JP Morgan EMBI index had a slight gain of 0.05% at 3:30 p.m. ET. Its spread to Treasuries tightened one basis point in a light trading day.

"It's dead as hell. Seriously. No one is calling," said a second fund manager.

"This may be the slowest I've ever seen it. It's pathetic. There's no volume, added the manager.

"Hedge funds are even bored to death; they're not really involved in the market because it's all range-bound.

"I'm not even sure that a dramatic drop in the Dow could shake things up, the way it stands. If it did shake things up, it would do so only in a marginal way."

"The key thing, I believe, would be the renewed doubts about interest rates. But according to the Fed, rates are going to stay low for quite a long time, especially in this environment in which there is no job growth."

And for the most part, there were no visible signs of volatility in trading, according to the manager.

"You've probably had some spread widening, but it was not drastic, which was really unusual," given the bad news from Asia recently, particularly the turmoil over the impeachment of South Korea's president.

Philippines, Ukraine and Brazil took some of the biggest hits, while Mexico posted gains.

Mexico's component of the EMBI index rose 0.33% to 299.75 by late afternoon. Its spread to Treasuries tightened by four basis points.

The Philippines component dropped 0.36% to 261.84. Its spread to Treasuries widened by three basis points.

Brazil falls again

Brazil continued to post losses after its resurgence in the second half of last week in response to the reduction in interest rates by the country's central bank late Wednesday by 25 basis points to 16.25%.

Brazil's benchmark C bond was down half a point to 97 bid in the late afternoon. The bond due 2040 was down 0.75 to 107 bid.

The Brazil component of the EMBI index fell 0.02% to 388.13. Its spread to Treasuries tightened one basis point.

On Monday the C bonds dropped 7/8 to 97 3/8 bid late in day while the 2040 bond was down over 11/2, to 107.75 bid.

While there was concern about the global situation, the main cause for Brazil's tumble was due to increased disenchantment with the government's tight monetary policy, according to a fund manager. Members of President Luiz Inacio Lula da Silva's Workers' Party, including 15 lower-house congressmen, said they wanted to see government policy do more to stimulate growth.

Bank Danamon to price

In upcoming new deals, Bank Danamon Indonesia expects to price an offering of 10-year bonds (B3/B-) on Wednesday. The size of the deal remains to be determined.

Citigroup and Deutsche Bank Securities will bring the offering to market.

Also surfacing Tuesday, Oman-based Bank Muscat is expected to launch a dollar-denominated international offering of floating-rate notes (expected ratings Baa3/BBB-) in mid-April. The size of the deal remains to be determined.

ABN Amro and HSBC are the bookrunners on this issue.

The Central Bank of Tunisia is working on a €300 million bond due 2011 (Baa2/BBB/BBB), with presentations to investors starting Wednesday in Munich then moving to Frankfurt on Thursday.

Merrill Lynch and Citigroup are the bookrunners for the Rule 144A/Regulation S.

Spreading troubles seen increasing volatility

Insurgencies around the world will cripple the markets as investors' perception of risks intensify in the coming months, according to Jephraim Gundzik, president of Condor Advisers, which provides emerging markets investment risk analysis.

"Not only do you have the insurgency in Iraq increasing in scope and intensity, you have the insurgency in the Palestinian territories escalating also.

"Insurgencies are escalating in Asia, in Thailand, Indonesia, the Philippines and Afghanistan. You have North Korea being completely intransigent about its nuclear weapons program and being supported by China and Russia in its position.

"Instability is also increasing in Latin America. All these events are ratcheting up geopolitical risk," he said.

OPEC's decision to withhold oil from the market while demand rises, mainly driven by China, will also impact the geopolitical uncertainty as the value of the dollar is pushed down.

"Volatility will increase to the degree that rising geopolitical risk is recognized by investors, and that will weigh on asset values, probably increasingly as the year goes on and as things continue to destabilize."

Furthermore, Gunzik said: "It will push the value of the dollar lower because the geopolitical risks, in general, are U.S-centric in the sense that geopolitical risk in the world is being pushed higher by U.S. foreign policy, essentially.

"It doesn't make the U.S. a safe haven necessarily. I think that is playing into people's minds right now.

"There will be more volatility in the U.S. bond markets, Treasuries, and much more amplified in the emerging markets. The global geopolitical risk environment is changing dramatically. And perceptions appear to be coming into line with what geopolitical events are actually telling us about geopolitical risk," added Gunzik.

Fund manager advises holding

And a fund manager suggested that holding onto bonds will be the best plan moving ahead into uncertain times.

"As an asset manager in this environment you buy duration and hold on to it. That's it: You buy something with a very high yield and a very high coupon, something that you have analyzed carefully, and you hold on to it," he said.

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