Emerging markets tighter on Treasuries; Korea Hydro prices $1 billion; IMF showing influence

By Aaron Hochman-Zimmerman

New York, June 10 - Emerging markets held steady in trading as the primary market proved its strength amid a volatile external environment.

Korea Hydro & Nuclear Power Co. Ltd. priced $1 billion at Treasuries plus 362.5 basis points.

Meanwhile, the U.S. Treasury found strong interest for its bond auction but at a rate of 3.99%, which made some investors reconsider the condition of U.S. government debt.

Many of the larger emerging market countries that hold U.S. government paper as part of their reserves have already expressed interest in selling some of those holdings in order to diversify their portfolios.

Some have even expressed interest in the new bonds discussed by the International Monetary Fund.

Still, trading in emerging markets was able to hold onto its generally strong levels as Argentina continued its rebound.

The discount bonds due 2033 were quoted at 48¼ bid.

From the major markets, equities and Treasuries went for a ride, but volatility only added 0.19 to close the day at 28.46, according to the VIX index. The index is a frequently used gauge of market volatility.

As a sector, emerging markets tightened by 5 bps to a spread of 408 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.

Korea Hydro prices $1 billion

Korea Hydro & Nuclear Power priced $1 billion of five-year senior unsecured notes to yield Treasuries plus 362.5 bps.

The debt (A2/A) came to market with a coupon of 6¼% and priced at 98.935 to yield 6.503%.

The bonds priced tighter than original guidance, which was set in the Treasuries plus 400 bps area.

Barclays Capital, Citigroup, Deutsche Bank and Goldman Sachs acted as bookrunners for the deal.

Korea Hydro & Nuclear Power is a Seoul-based government-run energy firm.

BRICs to build IMF

Reports surged throughout the market that Brazil, China and Russia all plan to purchase IMF bonds.

For its part, Brazil said it will invest $10 billion in the new bonds and the IMF's special drawing rights currency basket, according to finance minister Guido Mantega.

"In reality this is an investment Brazil is making with part of its reserves to aid developing countries," Mantega said.

The 11% Brazilian government bonds due 2040 were seen at 128½ bid.

China plans to reduce its holding of U.S. Treasury bonds and U.S. dollars, according to IMF managing director Dominique Strauss-Kahn.

Beijing plans to put $50 billion into the IMF's new securities.

"We are grateful to the Chinese authorities for signaling their intention to invest in IMF notes and thereby, helping the IMF membership weather this global economic and financial crisis," Strauss-Kahn said, adding that the increased capacity of the IMF to support emerging markets will make for a stronger global economy.

Also in Russia, "we are planning to gradually reduce the share of U.S. Treasuries," said deputy central bank chairman Alexei Ulyukayev.

Currently, almost 30% of Russia's $400 billion in reserves are held in Treasuries.

The Russian sovereign bonds due 2030 were spotted at 99 1/8 bid.

Emerging Europe watches IMF

The IMF was also at the center of the headlines in emerging Europe.

The head of the IMF mission to Belarus, Chris Jarvis, said the Washington, D.C.-based lender may increase Minsk's standby loan arrangement by SDR 651.4 million, or $1 billion, according to a statement.

"This increase is justified because Belarus' financing needs arising from the global economic crisis have increased, and because the government and the central bank are making strong efforts to solve their problems," Jarvis said in the statement.

The 15-month $2.5 billion arrangement was approved on Jan. 12, 2009.

In Turkey, the government and business leaders continued to wrangle over the question of whether or not the county could go without a new standby facility from the IMF.

Economy minister Ali Babacan has stated that Ankara is prepared for go with its economic plan "with or without" the IMF.

The lira was seen trading at 1.544 to the dollar.

LatAm rebounding on inflows

In Latin America, "believe it or not volume is doing very well," a syndicate official said.

Inflows to emerging markets as a whole have kept traders busy while on the primary side, "you've got a decent pipeline," he said.

Mexico's "Pemex is supposedly eying the market," he said, although, "I don't see anyone coming to market in the next couple weeks."

Petroleos Mexicanos SAB de CV "still has some capex they need to fund for 2009," he said, including another $1 billion or $2 billion in debt issuance for 2009, but "they're going to have to pay."

There is potential for a "small one-off issuer," he said, but the larger potential issuers, such as Costa Rica and El Salvador will wait.

Still, they cannot afford to wait too long, he said.

"With yields rising the way they are on U.S. Treasuries, these guys have got to come," he said.

In trading, "Argentina is doing well," he said, as the 8.28% Argentine discount bonds due 2033 were quoted at 48¼ bid.

However, in Venezuela, the national oil firm "Pdvsa is widening against the sovereign," he said.

It is assumed that 80% of fiscal expenditures "are directly out of Pdvsa and oil," he said, but "people are just reading differently the Pdvsa link to the republic," he said.

The are major transparency problems looming over Pdvsa.

"It's a black box," he said, "no one knows how much they produce ... they're audited internally," he said, adding that "they don't abide by OPEC rules and regulations."

The 9¼% Venezuelan sovereigns due 2027 were quoted at 69 7/8 bid, while the Pdvsa bonds due 2027 were seen at 42¾ bid.

Asia strong on primary

Asia was uplifted by the strong pricing of Korea Hydro, but elsewhere in the Philippines, foreign direct investment saw $44 million in inflows during the first quarter of 2009, according to the central bank.

Inflows declined 83.5% from the first quarter of 2008.

"Contributing to the first quarter net inflows were the positive balances registered in equity capital and reinvested earnings which more than offset the net outflow in other capital," the bank said.

The peso was seen trading at 47.425 to the dollar.

In Indonesia, the mining giant Australia's BHP Billiton said it may cancel plans to invest $100 million in the Haju coalmine, according to the Jakarta Post.

The company "has assessed the progress of the Haju trial mine and determined it is not a sufficient fit with our long term investment strategy," a company release said.

The decision may have even farther reaching effects on the future of BHP Billiton's relationship with the Indonesian coal sector.

"Haju was stage one of the Maruwai Coal Project development, the 100% BHP Billiton owned metallurgical coal deposit in Central Kalimantan," the company said.

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