EM spreads grind tighter despite Treasuries decline; KT Corp. sells $200 million in bonds

By Reshmi Basu and Paul A. Harris

New York, April 26 - Emerging market debt continued to show fierce determination Wednesday in the face of another U.S. Treasuries downturn as spreads narrowed to another record low.

In the primary market, Korea's KT Corp. sold a $200 million issue of 10-year notes (A3/A-) at 97.743 to yield Treasuries plus 110 basis points or 6.161% via Merrill Lynch and UBS.

Also Thailand's state-controlled TMB Bank Public Bank Ltd. sold a $200 million offering of hybrid tier I perpetual bonds (Ba2/BB-) at par to yield 7¾% or mid-swaps plus 213 basis points.

The deal priced wider than price guidance. Guidance was set 175 to 200 basis points over mid-swaps or a yield of 7.30% to 7.55%.

Barclays Capital and DBS Bank were the lead managers for the issue.

EM grinds tighter

Wednesday's U.S. Treasury slump did little to deter emerging market debt. The yield on the 10-year Treasury note shot up three basis points to close at 5.10%, posting its highest level since May 2002.

While the sell off in U.S. government bonds was not dramatic, emerging markets always had its eyes on it, noted a trader.

"A lot of the spreads are doing okay," he observed.

In recent sessions, a Treasury sell off has been accompanied by tighter spreads for emerging markets. And Wednesday proved no different as the spread on the JP Morgan EMBI+ narrowed three basis points to 179 basis points versus Treasuries, which was a new record low for the asset class.

However on a dollar basis, the market was flat to slightly weaker, according to a market source. During the session, the Brazilian bond due 2040 slipped 0.10 to 127.55 bid, 127.65 offered. The Mexican bond due 2026 fell 0.25 to 152 bid, 153 offered.

But oil credits moved higher. The Ecuadorian bond due 2015 edged up 0.75 to 107.25 bid, 108.25 offered while the bond due 2030 gained 0.65 to 103.25 bid, 103.65 offered. The Venezuelan bond due 2027 inched up 0.10 to 125.25 bid, 125.85 offered.

The combination of high commodity prices, coupons and amortizations and recent debt buybacks from Brazil and Venezuela have helped offset Treasury volatility, noted sources.

"On one hand, you are surprised by the resiliency, but you have also had a tremendous amount of cash paid out to investors in the last three weeks," added the trader.

An emerging market analyst agreed that there is ample money out there that needs to be put to work.

"I think the resilience reflects the fact that there's a large effective bid for paper in the market right now on the back of the government buybacks that are under way," noted the analyst.

"Nobody wants to sell as long as everyone knows that governments are buying paper back.

"Eventually those buybacks should fade and spreads should then adjust to the new reality in UST yields, but that could take another several weeks," said the analyst.

But the trader pointed out that investors are becoming nervous about the direction of interest rates.

"I don't think they are spending all the money that they have. Flows into funds, outside of the interest/principal payments, have probably been lighter."

One sellside source said the current environment is one where local or credit-related news are being overshadowed by U.S. economic news. He expects spreads will remain range-bound following U.S. Treasury volatility.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.