Asian debt holds in as Chinese stocks see big drop; EMBI finishes wider

By Paul A. Harris

St. Louis, Aug. 31 - Emerging markets widened somewhat in extremely illiquid pre-Labor Day trading on Monday, sources said.

A bank holiday in England exacerbated the quiet.

The EMBI+ index widened by 5 basis points on the day, according to an asset manager on the U.S. West Coast, who said that the official close was 380 bps bid.

Asian debt widened by 3 to 5 bps from Friday's close, which is not bad considering the Shanghai Composite Stock Index fell more than 6.5% overnight, a trader remarked.

"Everything weakened up a little on the back of the sell-off in China," a syndicate banker in New York said, heading into the U.S. close.

However, most of the sell-off was concentrated in equities, the banker added.

The credit markets softened a little, on very light trading, the source added.

While the US CDX Investment Grade 12 index was 4 bps wider on the day, the Asian Investment Grade 12 widened by 6 bps, the banker said.

Meanwhile in Latin America, Argentina, now in the throes of a seven-day agricultural strike, widened slightly in very limited trading.

There was no news in the primary market.

However there was a buzz in the market about Korea National Housing Corp.'s benchmark-sized, dollar-denominated Regulation S deal, which began its investor roadshow on Monday.

Korea National Housing whisper

Whispered guidance surfaced on the Korea National Housing deal.

The Korean quasi-sovereign issuer is expected to sell $500 million of new senior unsecured notes (A2/A), according to a market source.

The unofficial guidance is Treasuries plus 250 bps to 270 bps, the source added.

The roadshow began Monday in Singapore, and moves to Hong Kong on Tuesday.

It wraps up Wednesday in London.

Bank of America Merrill Lynch, Citigroup, Goldman Sachs, Morgan Stanley, Samsung Securities and UBS are managing the Regulation S deal.

Korea National Housing: 'decently aggressive'

The 250 bps to 270 bps whisper on Korea National Housing is "decently aggressive," according to a U.S.-based investment banker who is not in the deal.

Most of the Korean debt is wrapped around 250 bps, the banker added.

Meanwhile a New York-based trader who focuses on Asian fixed income also said that the whisper on Korea National Housing is in line with the way Korean quasi-sovereign bonds now trade in the secondary market.

The whisper makes very little new issue concession, the source said.

For example, Korea Hydro & Nuclear Power Co., Ltd. existing bonds were at 255 bps bid, 240 bps offered on Monday afternoon.

Korea Electric Power Corp. (Kepco) bonds were at 250 bps bid, 235 bps offered.

"Pretty much all of the Korean quasi-sovereign stuff is trading in that ballpark," said the trader.

Korea's appeal

The reason that not much new issue premium can be divined from the Korea National Housing whispered guidance of Treasuries plus 250 bps to 270 bps is that Korea remains fundamentally a pretty decent story, the trader remarked.

"There had been considerable reliance on short term financing on the part of the Korean banks and corporates, which is just a function of how the markets work there," the trader said.

"Hence Korea was punished pretty hard during the sell-off because of the sizeable rollover risk.

"Now that investors have satisfied themselves that Korea has the ability to get its refinancing done, a lot of the premium in Korean spreads has disappeared."

Convergence, stability

The New York-based trader had been away from the market for a fortnight, which afforded interesting contrast.

Hong Kong and Malaysia high-grade paper widened by approximately 15 bps in that time.

The corporate bonds of Hutchison Whampoa International Ltd. finished Monday's session at 225 bps bid, 215 bps offered, unchanged on the day but 10 bps wider than the 215 bps bid, 205 bps offered of two weeks ago.

While Hong Kong and Malaysia high-grades widened, Korea high-grades tightened by around 15 bps during the past two weeks, the trader said.

Korea's 7 1/8% sovereign bonds maturing in 2019, at 200 bps bid, 190 bps offered late Monday, are little changed - perhaps 15 bps tighter - over the space of two weeks, and probably now 5 bps off their tights, the trader said.

So there has been some convergence between Hong Kong and Malaysian high grades, on the one hand, and Korean high-grades on the other, the source remarked.

Meanwhile Asian investment grade CDS spreads opened the Monday session at 133 bps bid 139 offered, whereas they were at 130 bps bid, 135 bps offered two weeks ago.

"It's amazing how stable that has been," the trader remarked.

Argentina weaker

The planned week-long strike by Argentina's agricultural sector to protest a presidential veto of legislation that would have provided tax relief for farmers in drought-stricken districts, entered its fourth day on Monday, a West Coast-based asset manager recounted.

The bonds, which traded 4 points lower on the news last week, continued to ease on Monday, the source said.

Although trading was limited, Argentina's 8.28% discount bonds due in 2033 were at 58¼ bid, 59¼ offered, heading into Monday's New York close.

Late last week they were at 59 bid, 59¾ offered, the source recounted.

Meanwhile Latin American spreads, apart from Argentina, were pretty much unchanged on the day.

"It was very quiet," said the buy-sider, who added that those players who were in their offices attended to month-end tasks, as Tuesday will be the first day of September.

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