Emerging markets soften; Korea Gas opens books, bonds to price Thursday; spreads ripped wider

By Aaron Hochman-Zimmerman

New York, July 8 - Emerging market bonds were mostly weaker on Wednesday, although Asia performed well even as new supply poured into the sector.

Korea Gas Corp. opened the books for its $500 million bond offering and talked the offer at Treasuries plus 400 basis points to 420 bps.

The KoGas bonds follow the new Export-Import Bank of Korea bonds, which priced Tuesday and traded well from 350 bps to 365 bps.

In trading, there is "weakness carrying in" from the developed markets, a strategist said, but on the primary side, "the market will continue to see issuance," he said.

The new issuance, however, will have to price "at a discount to the secondary market," he said.

Credit continued to tread between positive and negative developments, while the International Monetary Fund published a similarly tempered assessment of the path forward for the global economy.

"Stabilization is uneven and the recovery is expected to be sluggish," the IMF said in its World Economic Outlook, although "the world economy is stabilizing, helped by unprecedented macroeconomic and financial policy support."

"Global activity is forecast to contract by 1.4% in 2009 and to expand by 2.5% in 2010, which is 0.6% higher than envisaged in the April 2009 WEO [report]," the IMF report continued.

Meanwhile, from the major markets, equities were strong early, but volatility jumped in the morning and eased later on, only gaining 0.45 to close at 31.30, according to the VIX index. The index is a frequently used yardstick of market volatility.

Treasury yields sank as emerging markets spreads widened by 21 bps to a spread of 455 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.

Books open for KoGas

KoGas opened the books and released talk of Treasuries plus 400 bps to 420 bps for its $500 million five-year bonds (A2/A/).

The indicated yield was calculated at 6.3%.

Deutsche Bank, JPMorgan and Merrill Lynch will act as bookrunners for the bonds.

A roadshow began on Monday in Los Angeles and Singapore, traveled to Hong Kong and New York on Tuesday and concluded in Boston and London on Wednesday.

Proceeds will be used for general corporate purposes.

KoGas is a Bundang, South Korea-based energy firm.

The deal is expected to price "supposedly tomorrow," a trader said on Wednesday.

"The books are big, $4 or $5 billion," he said.

More supply from the Asia pipeline is expected, he said. "KepCo is supposedly doing something," he said.

"There's plenty more supply coming," he added.

Asia handles supply

Asia was trading well with a "pretty good appetite" for the new supply flowing into the sector, particularly from South Korea, a trader said.

The new 5 7/8% bonds priced by Kexim on Tuesday were "trading pretty actively," the trader said.

The bonds, which priced at a spread of 362.5 bps, saw a tight print at 350 bps and traded as wide as 365 bps overnight, the trader said.

Still, "I've sold more paper than I've bought today," he said.

Generally, "all CDS is wider," but "cash is actually holding relatively well," he said.

The South Korean bonds due 2014 were seen 10 bps wider at 260 bps bid, 250 bps offered.

In Indonesia, the outperforming bonds were still strong, but even the well-received election served to slow the bonds' climb.

As exit polls were registered, each showed a strong lead for incumbent president Susilo Bambang Yudhoyono.

It seemed likely that Yudhoyono would surpass the 50% mark in order to forego a run-off election in September, the Jakarta Post reported.

The Indonesian government bonds due 2019 were quoted at 128 bid, 129 offered.

Meanwhile, the Philippines' sovereigns due 2030 were quoted at 121 bid, 122 offered.

In China, the Finance Ministry was unable to sell all of the 28 billion yuan in one-year notes offered at auction.

Only 27.52 billion yuan were sold at a yield of 1.06%.

The ministry has not suffered an undersubscribed auction since 2003.

Argentina leads LatAm lower

Latin America was caught between dwindling hopes for a swift global recovery and falling Treasury yields, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

Argentina was "off with the rest of the market," he said.

The changes to the cabinet were taken as a sign that the government does not intend to quickly acquiesce to the opposition forces, which won the recent legislative election.

"While Nestor Kirchner is a head of this administration, nothing is going to change. We need real changes," said Francisco de Narvaez, according to the Buenos Aires Herald.

De Narvaez defeated Nestor Kirchner for a Buenos Aires legislative seat.

"It's too presumptuous to think that Argentina is going to change in 10 days," a strategist said, but the political intrigue has been a reason to sell some of the paper, which inflated in a recent rally.

The 8.28% Argentine discount bonds due 2033 dropped 2¾ points to 50½ bid, 51¼ offered.

"That's taking it on the chin," Alvarez said.

Elsewhere, Peru's newly retapped 7.35% bonds due 2025 was "holding up well," Alvarez said.

The bonds traded lower by 0.7 point and was quoted at 104.3 bid, 104.8 offered.

Brazil was a mild outperformer in the category as the 7 1/8% Brazilian sovereigns added just 1/8 point to 100.45 bid, 100 7/8 offered and the 11% bonds due 2040 were seen at 130 bid, 130¼ offered.

Meanwhile in Venezuela, the 9¼% government bonds due 2027 added 0.5 point to 67¼ bid, 68¾ offered.

Emerging Europe pulled wider

Prices in emerging Europe were stable as spreads widened on Wednesday.

In Russia, the government still intends to join the World Trade Organization along with Belarus and Kazakhstan, president Dmitry Medvedev told reporters.

The Russian bid to join is 16 years old, but Moscow was encouraged by the support of the United States.

The Russian sovereign bonds due 2030 were quoted at 97½ bid, 98 offered.

In Ukraine, prime minister Yulia Tymoshenko signed a letter from the cabinet pledging to keep inflation under 13% in 2009, reports said.

In the first half, inflation only totaled 8.6%, according to the Kiev Post.

The letter was designed to reassure the IMF that Kiev is deserving of the next tranche of the prearranged loan.

The hrvynia was seen trading at 7.655 to the dollar.

Meanwhile, Turkey's bonds due 2030 were seen at 152 bid, 152½ offered.

© 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.