Week starts in recovery mode despite Treasury losses; Ecuador slides again; Kexim sets Samurai talk

By Paul Deckelman and Aaron Hochman-Zimmerman

New York, June 11 - Emerging markets largely stabilized in Monday's session trailing last week's sell-off and the session passed in relative quiet in spite of continued upward movement in the yield of U.S. Treasuries.

However the Republic of Ecuador, where a high government official has been dogged by allegations of attempting to manipulate the financial markets, saw its sovereign debt continue to relinquish values.

Ecuador's 9 3/8% notes due 2015 plunged a point and a half.

The primary market, meanwhile, produced only a modicum of news during the Monday session, as Export-Import Bank of Korea set price talk on a Samurai deal now in the market.

Recovery mode

The emerging market secondary sphere for the most part continued to recover on Monday from the panicky selling and spread widening which had been seen around the middle of last week in knee-jerk response to the spike upward in U.S. Treasury yields on inflation worries and the resulting tumble in equity markets in the United States and the world over.

Prices were fairly steady, or off maybe a little, marked down in line with retreating Treasury issues.

The yield on the benchmark 10-year government notes was 5 basis points higher at the day's end at around the 5.15% mark but spreads between Treasuries and emerging bonds were actually steady to a bit narrower on the day.

The widely followed J.P. Morgan & Co. EMBI+ index comparing the average spreads of emerging debt with Treasuries was quoted about 3 bps lower, around 156 bps.

While this is a few bps over the all-time tight levels around 149 bps, it's still considerably below the bloated readings in the low 190s the index hit during the massive worldwide financial market meltdown seen over the course of several weeks in late February and early March.

Asian market quiets down

A New York-based trader in Asian issues characterized the session as "pretty quiet, noting that after relative firmness earlier on, "we have seen a little bit of late-day weakness, just as equities have come off and Treasuries have pushed back towards the lows of the day."

He said that there had been "a bit of selling towards the back [long] end of the Philippines and Indonesia cash curves," the benchmark sovereign bonds for high yield investors in that region of the world.

"It was pretty much just marking Treasuries down" and bringing EM issues down with them.

However, he reiterated that "aside from that, it's been a very quiet session."

But while there was some price weakness to be seen, spreads over Treasuries were seen having improved, as the latter's yields were once again on the rise.

"Basically, we've recovered a reasonable amount of last week's widening on Friday and during the Asian session today," the trader said, observing that during the New York day things "were largely just trading around those levels."

For instance, he quoted the five-year credit default swaps on Philippines sovereign debt at 101-104 bps - still well above the all-time tight levels around 94 bps which that contract had hit around the beginning of last week, but considerably tighter than the 110 bps level to which it had ballooned on Thursday when emerging market bonds all around the globe had taken a pounding as investors moved out of relatively risky vehicles, lured by higher Treasury yields.

On the corporate front, he said, bonds were "largely marked down with Treasuries, give or take, but there wasn't a great deal of flow.

"Typically, what happens when you get this great volatility" as the market has seen over the past few sessions, he explained, "is that the focus in trading sort of moves toward the more liquid instruments.

"So the sovereigns tend to trade a lot more, both in cash [bonds] and CDS, and that's really what we've seen.

"High yield corporates were marked lower in line with Treasuries, but other than that, there hasn't been a great deal of activity going around."

Earlier, during the Asian trading day, bonds were initially seen a little on the weak side, as investors trimmed their positions a little, just in case the world financial markets decided to pick up where they had left off last week.

The Philippines sovereign 2032 bonds, considered a benchmark, were being quoted around 95.25 bid, 95.50 offered, about ¾ point behind where they had finished on Friday in New York.

However, the five-year CDS price had actually come in by 1 or 2 bps to 100-105 bps, and mostly held around that level as the day wore on and trading shifted to other markets

Turkey bonds seen improved

Elsewhere in Asia, Turkish bonds - which had fallen badly on Friday on investor fears of a possible widening of that country's ongoing struggle against Kurdish separatists, which saw Turkish troops in hot pursuit of the rebels into war-torn Iraq - were showing some bounce.

The dollar-denominated benchmark bond was about 1/8 point firmer at 150.625, its yield meanwhile tightening to 7.129% from 7.27% on Friday, while the yield on the benchmark lira-denominated local-currency bonds due 2009 was seen falling to 18.45% from Friday's elevated 18.60% level.

Five-year CDS contracts on Turkish government debt were seen having narrowed about 1 bp on the day to the 152 bps level.

"There wasn't much going on, though," with Turkish paper in New York, the trader said. "It seems like spreads stabilized today."

During Friday's wild session, the Turkish CDS contract had widened out drastically, to around the 161-162 bps level, before coming back in to end in the lower 150s.

Ecuador bucks calming trend

One of the few markets which did not share in the generally calming, moderating trend, was Ecuador, whose volatile bonds widened out sharply on continued investor concern about the country's intentions of paying its debt as well as the nasty scandal which has engulfed economy minister Ricardo Patino.

The dollar-denominated 9 3/8% notes due 2015 were seen having plunged 1½ points to a level around 90.5, with its yield zooming nearly 30 bps to just over 11%.

Patino has been under fire ever since his image was captured on a secret videotape, allegedly discussing ways of manipulating the debt market with several bankers. The official denies any wrongdoing, contending that he had the tape made in order to show how easy it might be for bankers to manipulate the market. On Monday, a newspaper in Quito speculated that the embattled Patino might resign his post to run for a seat in the country's new constitutional assembly. A Patino spokesman said he's not going anywhere.

Quiet day in primary market

Monday's primary market saw the release of talk for deals from Kexim and First Rand Bank.

"I believe we will see more deals launch on Tuesday or Wednesday," a sellside source advised Prospect News, adding that the release the looming releases of economic statistics and the specter of interest rate hikes in the summer months might entice issuers and their underwriters to attempt to get things done in the near term.

Asian action

Korea's Kexim intends to sell a five-year ¥35 billion samurai bond (A3/A/A+).

The deal is expected to price at a high-teens spread to yen Libor.

Daiwa has the books for the deal from the Seoul-based, state owned bank.

South Africa's First Rand Bank has issued guidance of euribor plus 50 to 55 basis points for its upcoming five-year issuance, according to a market source.

Citigroup and RBS will be the bookrunners.

Elsewhere Singapore's BW Group Ltd., will sell a benchmark-sized, dollar-denominated offering of 10-year senior unsecured bonds (Baa3/BBB-).

HSBC and Morgan Stanley will run the books.

A market source told Prospect News that the Asian economies have been insulated from the negative trends coming out of the United States.

Liquidity in the Asian market has kept it afloat, the source asserted.

© 2015 Prospect News.
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