ASIA CREDIT CLOSE: Bullish bond investors, short-covering prompts strong rally

Mon Sep 16, 2013 5:06am EDT

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SINGAPORE, Sept 16 (IFR) - Bond investors turned bullish today on news that Lawrence Summers had dropped out of the race to take over as Federal Reserve chairman.

Summers is widely seen as a hawk and the market was pricing in a tightening stance after he took over. His exit prompted a rally in Treasury futures this morning and Asian credit responded in similar fashion.

The sudden move caught many dealers short and, as they scrambled to cover positions, they added fuel to the rally. "The Summers news was the catalyst and it helped flush out some of the shorts," said one trader in Singapore.

Bonds gained fast and, as of 09:30 Singapore time, the Asia ex-Japan IG iTraxx Index was being traded at 131bp, 11bp tight to the 142bp at which it closed on Friday. It held up at that level into the close.

Cash was also boosted and some of the longer-tenor bonds that have higher correlation to Treasury moves saw sharp repricing moves. The 2043s of Pertamina, for instance, were bid at 78.50 by the close, while they ended last week being quoted at 76.00/76.25.

"People have realised it may be a very benign Treasury environment until the end of the year and they are reevaluating their IG holdings," said the trader, adding that funds still had cash holdings in the high single digits, above historical averages, and, therefore, had money to deploy.

Overall, investment-grade cash bonds were 7bp-11bp tighter in spread terms across the board as investors sought to get long again on better-rated credits to ride a potential rise in Treasury prices.

"I had accounts looking for 5-year Indian corporate paper at 350bp over Treasuries, which you could not have sold for 425bp three weeks ago," said another trader, adding that there were no offers of the paper and that investors were seeking corporates as bank paper from India had vanished.

High yield was also benefiting from the strong tone and some of the bellwethers of the asset class, such as Country Garden 2017s, were up USD2 in price terms.

The upbeat tone was also being reflected in the primary market, where a new USD300m 5.5-year dollar bond from Greentown had already amassed USD5.5bn in demand.

Some analysts and traders, however, remained sceptical about how long the rally could continue. "You can call me a China bear for the rest of the year," joked one analyst.

One trader in Singapore said he feared that issuers might cap the upside for the secondary as they came to the market to take advantage of the recently rediscovered appetite for bonds. "Issuance could cap gains, if investors are inundated with new bonds," he said.

Another trader suggested that the same positive tone that the exit of Summers from the Fed run caused could be reversed with a hawkish statement from the FOMC when it finished its monetary policy meeting on Wednesday. "Everything could change on Wednesday again," he said.

Christopher.Langner@thomsonreuters.com

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