ASIA CREDIT CLOSE: Short covering buoys IG
SINGAPORE, Sep 6 (IFR) - Late-week short covering and a rise in Treasury yields have squeezed investment-grade spreads. The Asia iTraxx IG ex-Japan finishing the week at 148bp, 2bp tighter than yesterday and some 12bp tighter in the week.
Part of the move was due to a 14bp rise in the yield of the 10-year US Treasury over the course of the week. As investors pared their bearish bets on emerging markets, cash bonds in the region remained fairly steady and resulted in tighter spreads.
Earlier in the week, however, dealers short some of the higher-beta high-grade paper in the region, betting that the Treasury move would push prices lower, as it did. But it also prompted spreads to widen.
Today, some of those who had bet on lower prices started to take profits on the short positions. At the same time, as the market grounded tighter, some of the spread-based shorts were being covered ahead of the nonfarm payroll numbers.
"Nobody really knows what will come, it all depends on the nonfarm payroll," said one trader in Singapore. The uncertainty, therefore, added to the incentive to unwind some of the positions, and as most of the market was short, all of the region's credits gained.
Among the most sought bonds were from Chinese state-owned companies, as they are easier to short given their liquidity. The whole sector was some 5bp-10bp tighter as brokers and hedge funds sought securities to cover their bearish options.
Korean names, especially policy banks, were also in demand. That helped push the spread on the new 10-year bond of the Republic of Korea even tighter to 98bp, 17bp tight to the reoffer spread of 115bp printed on Wednesday.
High-yield bonds also held up fairly well throughout the week, dropping only to reflect the lower Treasury prices. According to one trader in Hong Kong, the average price of sub-investment-grade bonds in the region finished the week less than USD1 down.
There was a bit more of selling in the -end bonds, and Country Garden 2023s finished the day quoted at 93.00-93.50, USD1 weaker than yesterday and about USD1.5 weaker in the week.
With positions overall light, all eyes are now turned to the US, where nonfarm payrolls today will be the key event driving trading in the next two weeks.
"If we see a strong number and 10-year Treasuries reach the 3.2% they could easily go up to 3.5%, if the number is weak and we fall back below 2.9% it could go as far as 2.75%," said an investment-grade trader. "It all depends on Treasuries and that can impact cash bonds."