ASIA CREDIT CLOSE: China-Japan spat,supplies spark consolidation

HONG KONG, Sept 18 (IFR) - Asian credit markets are in consolidation mode amid rising tensions between Japan and China, the region's two largest economies. The stepped up pace of supply also provided an excuse for a pause in the recent rally.

The Asia ex-Japan iTraxx investment grade index widened out slightly to 116/117.50, about 2bp wider on the day with Japan's 5-year CDS widening about 4-5bp to 74/77bp.

"In IG (investment grade sector) there has been so much supply, investors are taking some chips off the table and high yield has rallied so much, they have started to lock in profits to take advantage of higher cash prices," said a Hong Kong based head of trading at a European bank.

Still, newly sold bonds are broadly trading tighter as real money accounts continue to pour money into higher yielding assets in a low rate environment.

KoFC's reopened 2017s are trading at 120/118, much tighter than the reoffer of 123bp which itself is a big move from the level of 180bp when it was first sold in July.

IDBI's new bonds are trading around 365/363bp compared with a re-offer of 370bp. But gains may be muted going forward as more Indian lenders are expected to follow aiming to capitalise on the boost from the government's recent reforms.

Sun Hung Kai & Co bonds were the underperformer among new issues as they fell prey to short selling and private bank selling, hitting a low of 97.5 before recovering to 99/99.5, or just below reoffer of 99.6.

The sentiment remains watchful, though not necessarily nervous, awaiting more supplies as the year to date tally has just crossed the USD100bn mark. That is over 30% more than last year and a fifth more than the previous record.

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Chinese property bonds, top performers among Asian credits this year, were down by USD0.5 but some of the smaller credits were higher as a result of short positions being squeezed out.

One high yield trader said the recent success of Kaisa and Road King, which traded as much as USD2 above reoffer on their debut had repriced segments of the property market.

Guangzhou R&F 2016 was bid at 105 compared with a re-offer of 99.06 last month and the KWG 2017s are at 112/113 compared with their March re-offer level of 99.112.

"Some of these names are in a short-squeeze after the recent rally and the two new issues have also repriced the sector," said the trader.

Elsewhere in the sector, China Fishery bonds due 2019 have started to slide to stressed levels after Moody's said more than 50% of the company's revenues could be wiped out if a regulatory decision in Russia goes against it.

The bonds were downgraded to B1 from Ba3 which caused the bonds to trade at 70/80 down from 79/80. The collapse in the bid is over doubts if there were any rules breached by the company. This is a big capitulation from the 98 levels at the start of the month and last month's par reoffer.

"Moody's is concerned over whether the Russian authorities will interpret China Fishery's agreements to buy fish from Russian entities as actions towards establishing control over biological resources in Russian waters without government approval," the agency said in a statement.

But some investors, particularly those tracking distressed assets, could start looking at these bonds as the company still draws half its revenues from other geographies along with the possibility that new licences may also be procured, traders said.

(umesh.desai@thomsonreuters.com)