ASIA CREDIT CLOSE: Hedge funds buy protection in mixed session

Mon Sep 23, 2013 5:21am EDT

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SINGAPORE, Sept 23 (IFR) - Asian secondary credit had a mixed day, with seasoned off-the run investment-grade bonds well-bid and advancing around 25ct in price terms, while hedge funds purchase single-name credit protection and the long end of sovereign curves sold off.

This was expected to be one of the busiest days for new issue announcements since May, but that failed to materialise, as only one deal is live - for GS Caltex, which is lining up a 5-year Global.

That issue will be an interesting test of how much investors are willing to accept in terms of the new-issue premium. The paper is guided at Treasuries plus 215bp, but widely expected to be tightened in sharply ahead of pricing tonight in New York hours.

"Too many people have been talking about crazy supply and this has kept a lot of people on the sidelines as they wait for it to emerge. Although the off-the-runs have done okay, real money is waiting to get back into the market via new paper.

The problem is they want that paper to be cheap and I'm not sure issuers are willing to pay up to meet those expectations," said a Singapore-based investment-grade debt trader.

He said that there were a lot of short duration and cash positions established defensively in May, which would be looking to extend up the curve or find a home in new issues. This may be from a relatively short-time horizon perspective, rather than based on a new assessment of the direction of long-end US interest rates.

Interestingly, the sharp contractions seen last week in single-name sovereign CDS have all but reversed with the prevailing mood one of reality setting in after what many see as an excessively euphoric reaction to the Fed's decision not to taper QE.

So, while China and Korea 5-year CDS tightened around 7bp each last Thursday, that has been retraced, back to 0bp/73bp and 80bp/83bp, respectively.

Hedge funds have been buying protection on the view that tapering concerns have not gone away and will simply re-emerge in the run-up to next month's FOMC meeting.

The Indonesia 2043s and Philippines 2037s are each off around 50ct to USD1, having been beneficiaries of the post-Fed move last week, with fast money booking the fast profit made over the past two trading sessions.

The Asia iTraxx IG Index is closing out at 145bp/147bp, or 2bp wider on the day, having added 1bp towards the close, in a measure of the more sober market tone.

jonathan.rogers@thomsonreuters.com

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