ASIA CREDIT CLOSE: Investors focus on corporates
SINGAPORE, Dec 7 (IFR) - Asian markets tightened in the past week amid thin liquidity as money has continued to flow into the region and the new issue activity has slowed down. While CDS ended slightly wider, most corporate bellwethers in the region ended the week on a positive note.
In fact, there seems to be a growing consensus among analysts that there is little upside left on sovereign paper in Asia and this has seen the focus turn more to company debt.
This would explain the underperformance on the derivatives side, which is the realm of sovereigns. The Asia iTraxx IG Series 18 closed the week some 2bp wider quoted at 111bp-113bp.
Much of that move, however, happened on Wednesday, when uncertainty about the fiscal cliff and a steep drop in Apple stock put some pressure on higher beta asset classes.
Overall, though, the index, as well as the underlying CDS, was stuck in a range for most of the week. "This was a typical NFP week," summarized one analyst, referring to the wait-and-see stance often adopted by investors ahead of the monthly employment numbers in the United States, which were due on Friday. Yet, there was steady buying, albeit not in volume, all week long. "All I saw was buying," said one trader.
If the year-end and the expectation of important economic news sapped liquidity, there still was more activity than at the same time last year. Traders said that institutional investors were picking up select names, as they sought out value-trades instead of just buying indiscriminately. Chinese investment-grade names were in favour, especially technology related names.
Tencent was one of those names where investors seemed to be finding hidden value. The Chinese service portal's bonds due 2018 ended the week almost 15bp tighter quoted on Friday at 203bp/193bp. "The company has net cash and it generates a lot of revenues so people realized it was undervalued," said one trader.
E-retailer Baidu, meanwhile, was getting the other end of the trade and it closed the week 6bp wider with the recently issued 2017s traded at 145bp/140bp and the 2022s wrapping at 184bp/179bp. The bonds remain tighter than reoffer spreads of 160bp and 185bp over US Treasuries, but they have lost much of their lustre in the past week.
As has been the norm lately, though, most of the activity centred around the new issues. On that front, investors were sending a clear message that new issue premiums are now mandatory. Without them, the bond will underperform.
For instance, the US$650m five-year bond by Hon Hai which printed at 165bp over on Thursday ended Friday at 160bp/163bp having rallied on the break to as tight as 154bp before a round of profit-taking sent them back close to reoffer.
The deal offered some 20bp of pick-up over some of its comps according to analysts, so investors were happy to continue buying in the secondary.
Keppel Land's US$250m unrated five-year bond told the opposite story as it closed the week quoted at 285bp/275bp over the five-year US Treasury, some 20bp wide to the reoffer spread.
Away from new issues and value trades, traders were busy mostly with headline activity. Reports that one of the parties could drop out of Mongolia's governing coalition sent the newly minted bonds of the sovereign into a tailspin (see chart). In one day, they dropped US$7 in price and by Wednesday afternoon the 2018s were quoted at 93.50 and the 2022s at 94.50.
Clarifications by the government that the party was yet to quit the coalition and a sense that the bonds were oversold prompted a pop back and the 2018s ended around 97.50 while the 2022s were at 98.50.
In the high-yield space, Chinese developers continued to gain ground as more of them reported sales that met their annual targets. "It seems like 8% is the new average yield for the Single B companies in the sector," said one analyst in Singapore.
Overall, the bonds of most companies from that space gained 50ct in price on average and Longfor 2016s, one of the bellwethers, ended quoted at 110.00/111.00.
Given the strong inflows to EM bonds funds - EPFR reported the asset class took in another US$1.02bn in the week ended December 5 - and the lack of supply, traders and analysts are betting that the tightening trend will continue. "It is very tricky to go short anything right now," noted one trader in Singapore.
Add to that some year-end window-dressing, which should start next week, and up seems like the only way to go. "Accounts have not even started to position for the year-end, the recent buying was just cash being put to work," said the trader.
To be sure, investors will continue to be picky, especially given the build-up in uncertainty around the fiscal situation in the US. Ultimately, though, that could still benefit investment-grade corporate credits in the region.
"If the US falls off the fiscal cliff, Treasuries will rally and that will mean even lower yields in the West, which should make Asia more attractive," said an analyst in Hong Kong.