Emerging markets hold against Treasuries; South Korea prices $3 billion bonds, trades lower

By Aaron Hochman-Zimmerman

New York, April 8 - Emerging markets held their ground despite sinking Treasury yields.

"The rally continues ... inexplicably," a strategist said.

Despite a resilient secondary market, the Republic of Korea hit the market with a $3 billion bond offering, which was not as well-received as many had expected.

Meanwhile, from the corporate side, Russia's OAO Gazprom and Brazil's Telemar Norte Leste SA plan to follow Korea with benchmark deals of their own.

At the trading desks, much of the action came from Venezuela and Pakistan, which posted positive results as rays of sunshine were starting to touch the political situations in both countries.

Venezuela's benchmark bonds due 2027 were better by 2 points, while Pakistan's benchmarks were better by 3 points.

As equities clawed higher, volatility saw a sharp drop in the afternoon and ended lower by 1.54 at 38.85, according to the VIX index. The index is an often used gauge of market volatility.

Treasury yields fell, but emerging markets wound slightly tighter by 2 basis points to a spread of 575 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was tighter by 3 bps with a spread of 626 bps.

The diversified index has a less strict liquidity rule for inclusion.

Korea prices $3 billion

South Korea caused the biggest splash of the day as it priced a $3 billion five- and 10-year deal (A2/A/A+) in line with talk at Treasuries plus 400 bps and Treasuries plus 437.5 bps, respectively.

The $1.5 billion of five-year bonds priced at 99.512 with a coupon of 5¾%.

The $1.5 billion of 10-year bonds priced at 99.052 with a coupon of 7 1/8%.

Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch and Samsung Capital acted as joint leads for the registered deal.

Proceeds will be used for selling and purchasing foreign currencies and for depositing or lending to the Bank of Korea.

Unlike a recent issue from South Korea's Hana Bank, the bonds did not trade well, a strategist said, which is "surprising."

The 7 1/8% 10-year bonds traded lower to 98.25 bid, while the spread widened to 452 bps bid.

Asia holds firm, Pakistan jumps

As a category, the iTraxx only traded wider by 3 bps, the strategist said, "so, it's not a huge sell-off."

Pakistan continued to find success and even stood out as the Obama administration emphasizes American focus on the region.

The Pakistani bonds due 2017 jumped 3 points to trade at 52 bid, 54 offered.

In Indonesia, the government is in deliberation over how it should issue $1.5 billion in samurai bonds, reports said.

The bonds will likely be issued in five- and 10-year denominations, but the government has yet to decide whether the issuance will come all at once, or will be spaced out over a few separate debt sales.

"The issuance of the bond, which probably will have a maturity rate between five and 10 years, will depend on our observations regarding the market conditions," said finance minister Sri Mulyani, according to the Jakarta Post.

The bonds carry the support of a $1.5 billion standby loan agreement from the Bank of Japan.

The agreement between the two governments will allow for better trading between their economies.

"The bond will provide yen supply in the domestic market so that we do not need to convert rupiah into U.S. dollars in our trading activities with Japan, which we all know is quite significant," Mulyani said.

The Indonesian sovereigns due 2019 gave back 0.125 point to 111.125 bid.

Also in Asia, the Philippines' government bonds due 2030 were lower by 1.75 points at 119 bid, 119.75 offered.

Emerging Europe stands firm

Emerging Europe largely maintained its positions as desks continued to thin out for the holidays and investors were again buying Treasuries.

The primary attracted most of the attention as Gazprom announced that it will hold a roadshow beginning on April 13 for a $2 billion bond (Baa1/BBB/BBB).

Credit Suisse will act as bookrunner for the deal.

The roadshow will be held in London and New York.

Gazprom is a Moscow-based energy firm.

Gazprom also announced that its April 2 deal was upsized by CHF 100 million to CHF 500 million.

The bonds were largely "locked away" by local investors, a trader said the day of pricing. "That won't be a trading instrument."

Also in Russia, the 2009 inflation rate may be able to remain below 13%, said first deputy chairman of the central bank, Alexei Ulyukayev, according to the Itar-Tass News Agency.

The ruble was seen trading at 33.708 to the dollar.

The Russian government bonds due 2030 were seen at 97.25 bid, 97.875 offered.

Meanwhile in Ukraine, the World Bank believes that the economy will shrink by 9% in 2009, according to reports.

The World Bank added that the fall of 9% may only be the beginning of the year's problems for Ukraine if Kiev does not take the proper actions to stem its financial crisis.

Since the first quarter of 2007, the hrvynia has lost nearly one-third of its value against the dollar and now trades at 8.005 to the greenback.

Elsewhere in the category, Turkey's sovereign bonds due 2030 were quoted at 140.5 bid.

Telemar to ring up new bonds

In the Latin American primary, Telemar Norte Leste announced that it will offer dollar-denominated benchmark-sized 10-year senior unsecured notes (Baa3//BBB-).

Banco Bradesco, Banco Itau, Banco Santander, BB Securities and Citigroup will act as bookrunners for the deal.

A roadshow will be held from April 13 to April 16 in Boston, New York, London, the U.S. west coast and the Philadelphia area.

Proceeds will be used to refinance outstanding debt and for general corporate purposes.

Telemar is a Rio de Janeiro-based telecommunications firm.

LatAm creeps higher

Meanwhile, the rest of Latin America traded mixed as Treasuries held back big improvements.

Still, Venezuela continued to perform well even as oil hovers around $50 per barrel.

"I saw a huge number of bids earlier," a strategist said, but was never able to determine the reason the credit was so popular.

"Everything is up around 2 points there," he said.

The tightening may be because "Chavez says he wants to make peace with Obama," a syndicate official said.

The 9¼% Venezuelan government bonds due 2027 were traded at 62.45 bid.

Meanwhile, with support from the International Monetary Fund, Mexico's peso remained on its recovery track.

The peso was seen trading at 13.3645 the dollar.

The 5 7/8% Mexican bonds due 2014 were up 0.4 point to 105.25 bid, 106.5 offered.

Also in Latin America, Argentina added 1.875 points to its 8.28% discount bonds due 2033 to 29.25 bid, 29.9 offered.

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