ASIA CLOSE: Late dip-buying reduces losses

SINGAPORE, Aug 13 (IFR) - High-yield credits were closing the day on a positive note after enduring a short-lived sell-off in the morning while investment grade credits were yet to recover all the ground given but were faring better than they started off on Monday.

The Asia iTraxx ex-Japan IG 17 Index was wrapping the day 4bp wider at 152bp mid-market. Half of the move, however, was due to US Treasury tightening as the 10-year benchmark was closing the Asian session almost 3bp tighter.

The safe-haven buying and simultaneous risk-shedding kicked-off early in the morning in the wake of negative headlines over the weekend which indicated that there could be some noise coming in from Europe again.

Two finance officials in Europe expressed opposition to bond buying by the ECB over the weekend, triggering fears the new hurdles would be placed in the way of the easiest short-term fix for the European problem. On top of that, another looming maturity from Greece brought Athens back to the attention of investors.

The headlines pushed CDS for Italy and Spain wider again, with the 5-year protection for the latter starting the European session 3bp-5bp wider at 515bp while the former's swaps are almost 5bp wider nearing 450bp again.

The knee-jerk reaction in Asia was mostly prompted by retail accounts taking profits and shedding risk as they got weary of what new surprises Europe could bring and worried that an illiquid August market may prompt outsized losses.

In early trading, the more liquid high-yield bonds were all trading 25ct to 50ct weaker in price terms. However, after lunch hour, following better-than-expected wholesale prices data out of Germany, London accounts went bottom-fishing and buoyed some of the credits that had been beaten down in the morning.

Their support of these bonds spilled over prompting Asian investors to start buying again.

That move was especially apparent on the lower-rated front, where benchmarks as Evergrande 2015s ended at 100.00/101.00, or 25ct higher in the day. The same applied to Shimao 2018s, which were closing at 102.75/103.75 after being bid as low as 102.25.

Crossover sovereign names as Indonesia and Philippines also saw similar dynamics but were having a harder time recovering the early losses. Local accounts in the Philippines managed to counter the selling pressure on the sovereign so that its bonds ended the Asian session just about 15ct-25ct weaker in price terms, with the 2037s closing at 116.00/116.50 and the 2022s at 103.25/103.50.

Traders noted, however, that the local buying was starting to flag just when London accounts stepped in and helped support the sovereign bonds, avoiding a deeper drop.

Yet, even in the sovereign arena trading was quite sparse, which helped exacerbate the bond moves. "Bid-ask spreads are super wide and people are shying from posting bids for fear of getting hit," said a trader in Hong Kong.

The sole underperformer was the Indian bank curve as investors dumped recently issued bonds from both State Bank of India and India Export-Import Bank. Both were 10bp wider in the day, partly because of the new cheap supply coming from Indian Overseas Bank and in part because of the weaker than expected results that SBI reported on Friday.

IOB saw books soar to more than USD2bn on a new USD500m 5.5-year Reg S bond that was being offered at 430bp, significantly wide to other recently issued bonds of Indian banks. Meanwhile, however, SBI's 2017s priced in July were quoted at the end of the day at 337bp-332bp, 10bp wide in the day.

India ExIm Bank was wide by the same amount quoted at 319bp-325bp. On Friday, SBI reported a sharp deterioration in asset-quality with non-performing loans growing and loan growth lagging expectations.

Christopher.Langner@thomsonreuters.com