ASIA CREDIT CLOSE: Summer lull comes to a quiet end
SINGAPORE, Aug 30 (IFR) - The last trading session of August came to a quiet end as traders braced themselves for what is expected to be a busy September.
"Things were really slow, maybe because it is the last day of the summer lull," said one trader in Singapore.
Investment grade closed the session about 2bp-3bp tighter with very small amounts changing hands.
"I expected at least a bit of month-end activity, but nobody was messing with their portfolio," said another trader.
There was some marginal buying of high-grade bonds, especially Hong Kong and China blue chips, mostly from retail accounts looking for bargains. Korea continued to grind tighter and even the longer-dated bonds, such as Kexim 2022s finished the week tighter, last quoted at 117bp/107bp about 3bp narrower on the week.
India was the sole laggard, having finished mostly unchanged in the day. But even there, banks from the subcontinent saw more buying. The Indian stock exchange continued to slide today and the rupee was again under pressure after Prime Minister Manmohan Singh suggested there was a silver lining in the drop of the Indian currency.
The quiet session, though, was seen as the final calm before the storm. September promises to be busy with a very big pipeline in sight and with potential volatility on the back of more action by the Federal Reserve.
Bankers have been talking about the Republic of Korea coming to market as soon as next week and of several South Korean corporates and banks lining up to follow. High-grade names from Hong Kong and China and the odd high-yield - Sri Lanka's National Savings Bank is just finishing a roadshow - are expected to test the waters as well.
All this supply comes amid fears that the Fed will start tapering its bond buying program and hence drain liquidity from the markets, a move that is expected to increase benchmark rates further.
While many analysts believe the first move by the Fed is already priced into Treasuries, some are starting to revisit the risk-free rates on their investment models.
Indeed, in the two years before Standard & Poor's started a review of the Triple A rating of the United States, the 252-day moving average of the US Treasury was most of the time above 3%, or more than 100bp over where it is now.
This suggests that there is room for benchmark rates to move a lot wider when the Federal Reserve starts to withdraw monetary stimulus. In fact, some analysts suggest that the Fed Treasury buying program reduced yields on the 10-year benchmark by as much as 200bp.
Given that the yields have risen from 1.6% to the current 2.77%, a full withdrawal of the asset purchase program of the Fed would entail a further rise in yields.
Hence, bond investors will be very skittish in the run-up to the FOMC's meeting on September 17. Given the tone of the discussion of the last meeting, analysts are split on their opinions if the Fed will start tapering asset purchases now or later.
That concern seems to be reflected in fund flows, which showed another week of net redemptions. Net outflows from EM dedicated bond funds for the week ended August 28 added up to USD2.013bn compared with USD1.29bn a week earlier according to analyst reports based on data from research firm EPFR.
The outflow was more pronounced in local-currency funds, which saw net redemptions of USD1.16bn, while USD454m left hard-currency funds.
"About 80% of total outflows were owed to retail investor redemptions. Meanwhile, outflows from dedicated HY funds dropped to USD905m from USD2,651m," ING said in a research note.
Outflows were higher for equity funds, which saw USD3.89bn pulled out compared with USD1.7bn a week earlier.
In the US, according to Lipper, taxable bond funds saw net redemptions of USD700m, while municipal bond funds saw redemptions of USD1.7bn. For the third consecutive week, equity ETFs experienced net outflows, handing back some USD3.1bn, according to Lipper.
In further testimony of the risk-off sentiment, for the week ended August 28, mutual fund investors shifted a net USD5.5bn to money market funds.
Investor interest in equity funds away from ETFs, meanwhile, remained intact. They injected a net USD2.2bn for the week -- for the funds' thirty-fourth consecutive week of net inflows and bringing their year-to-date total to USD134.7bn, Lipper said.
With investors raising cash, uncertainty about the direction of yields and a heavy pipeline ahead, it promises to be an interesting month ahead.
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