Emerging market debt slumps for the third day; Kaltim Prima postpones

By Reshmi Basu and Paul A. Harris

New York, May 10 - Interest rate fears held a tight grip on investors as emerging market debt slumped for the third straight day.

The upcoming rate hike by the Federal Reserve continued its hypnotic hold on investors, as little other news appears to be driving the market.

"There's nothing beyond that," said a sell-side source. "And you have to feel that at this point it's pretty well priced in.

"Of course you never know if you've hit the bottom until after it's over."

Market participants anticipate that the current uneasiness will keep investors sidelined until there are improvements on the technical front.

"I think a number of investors have fairly high cash levels," said the sell-side source. "Most people take the view that you stay out of the market while the technicals are like this.

"You don't step in front of a falling knife," added the sell-side source.

Little activity was seen on the trading floors on Monday. Only the benchmark issues were getting the nod by bidders.

"It's been very illiquid," said a portfolio manager. "Nothing has been really trading other than the benchmark bonds like the Brazil Cs, the Brazil '40s, the Russia '30s."

Fast money did breathe a little life to a very brief rally in trading Monday. But when the fast money left, the spreads widened.

"Nobody is really doing anything," he said.

"Usually, the fast money comes from shorts. That's why we had a bit of a lift on a short-lived rally. Now not even that is happening.

"So we have very wide spreads. Bidders just don't want to bid anything," he added.

"If you want to sell something, only the liquid bonds have a bid. It's really uncertain."

The JP Morgan Global Index fell by 1.95%. Its spread to Treasuries widened by 21 basis points to 500 basis points.

"We're doing a lot two-way flow," said the sell-side source. "But a lot of it seems to be driven by trading accounts that are probably trading it intraday, or at least something close to it."

Turkey suffers

Turkey bond issues fell hard during Friday and Monday's session, due in part to the weak local market.

The Turkey component of the EMBI Index slid 3.29%. Its spread to Treasuries widened by 48 basis points to 444 basis points.

Turkey's bond due 2030 lost five points in morning trading, said the sell-side source - although the source noted that it recovered somewhat and was only 2.5 points lower at late afternoon.

But, the source added: "They were down a similar amount on Friday.

"Turkey seems to be playing catch-up," said the sell-side source. "Certainly on spread levels it is still well inside of Brazil. And it has come off from some very tight levels.

"One of the reasons that Turkey's dollar bonds were so weak today was that the local market was weak, which was having a knock-on effect in the dollar market."

Brazil was also hit hard in trading.

"It's been sort of up and down throughout the day, but the direction has always been downward. It's just a question of how much," said the sell-side source.

The Brazil component of the EMBI index fell as much as 2.68%. Its spread to Treasuries widened by 37 basis points.

The Brazilian benchmark C bond was down 1.63 at 85.812 bid, 86.125 offered while the bond due 2040 fell 2.60 at 82½ bid, 82¾ offered.

Russia down ahead of holiday's end

Russia, too, was falling.

The Russia component of the EMBI Index fell 1.96. Its spread to Treasuries widened by 23 points to 404 basis points. After a holiday week, locals will return Tuesday to a market devastated by Fed hike fears.

And over the weekend, Chechnya's president Akhmad Kadyrov, elected last fall, was assassinated in a bomb blast in Grozny's Dynamo stadium, where Russian and Chechen leaders were attending a celebration marking the defeat of Nazi Germany in World War II.

However, interest rate fears and the poor performance of Brazil and Turkey may overshadow the political risk in the short-term.

"The markets have taken Chechnya events in stride in the past, and I expect that external factors - U.S. interest rates and the weakness in Turkey and Brazil - will be the most important drivers of the market when locals come back to work tomorrow," said an emerging market analyst.

"Still, the Chechnya violence does keep the issue on the front burner as a potential source of a more serious negative shock down the road," he added.

"It can't help," added the sell-side source.

Kaltim Prima Coal delays

Indonesia's second largest coal mining company has delayed its $375 million two tranche fixed- and floating-rate note offering due to market conditions.

"They're going to wait," said the sell-side source.

One market source added that it would be surprising if anything comes to market under this "strenuous environment."

Credit Suisse First Boston and JP Morgan were running the Rule 144A/Regulation S deal.

Korea Land joins calendar

Meanwhile Korea Land added to the pipeline with a $500 million bond due 2014 via Citigroup and Deutsche Bank Securities.

But how quickly the deal will price remains open to question. Price-sensitive borrowers will rethink whether or not they will come to market under these unfavorable market conditions.

"The Korean corporate issuers are so price-sensitive and so sensitive to how their spreads compare to those of other Korean issuers," said the sell-side source.

"Korean spreads have widened out a fair amount, but not nearly as much as the higher-beta stuff in emerging markets.

"Nevertheless it's still substantially wider. So I think a Korean issuer would wait."

Hong Kong in Q3

More details emerged on the planned Hong Kong sovereign deal Monday.

The island city is planning to price its inaugural HK$20 billion bond in U.S. dollar and Hong Kong dollar tranches in the third quarter.

How much say the Chinese government will have is yet to be seen. While it appears that Hong Kong does not need the mainland's approval for the bond deal, Beijing is becoming a more visible force in shaping the landscape.

"My guess is that they don't officially need it [approval]. It seems that these days in Hong Kong more and more things are directed by the mainland," said the sell-side source.

"In the paper the other day there was a picture of the Chinese navy sailing into Hong Kong harbor. It looked suspiciously like a big show of force.

"The Chinese claimed it was just an act of celebration of the Chinese navy's 55th anniversary. But someone noted that they hadn't done it for the 50th anniversary, and if you didn't do it for the 50th, why would you do it for the 55th?"added the sell-side source.

And as China takes measures to raise its interest rates, Hong Kong will surely be affected.

"China has been talking about raising interest rates, and taking steps to slow down the economy," said the sell-side source.

"Those things have a big impact on Hong Kong."

Meanwhile, in the rumor department, Kazakhstan's largest oil firm, Tengizchevroil, is said to be bringing a eurobond offering this year.

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