ASIA CREDIT CLOSE: CDS outperforms cash bonds
SINGAPORE, Sept 25 (IFR) - The cost of protecting against default in Asian markets was reduced today in spite of a negative tone in the rest of the financial markets. Stocks in the region took a cue from overnight US equity markets and traded lower most of the day.
Although Indonesian shares tumbled yet again on Wednesday, contributing to a 6% overall drop over the last four sessions, the credit default swaps for the sovereign surprisingly tightened about 1bp to 233bp/248bp.
Indeed, Asian CDS broadly outperformed the cash bonds today. The iTraxx IG index 20 was changing hands at 148bp/150bp, about 5bp tighter from Tuesday's close. China's 5-year CDS narrowed to 86bp/89bp while South Korea narrowed to 75bp/78bp, generally about 3bp-5bp tighter on single names.
With US Treasury yields now widely expected to head lower and 10-year yields now projected to slip to 2.55% by the end of this quarter, fears of increased credit defaults have lessened.
But it is a different story with cash bonds, as a heavy pipeline of deals continued to weigh on new issues. "If issuers pay up and give reasonable concessions, the deals will do well especially since it does not feel like another sell-off like the one in May could happen again," said one trader.
An example is Bangkok Bank's newly minted dual-tranche deal. The bank was smart to add a 10-year tranche in response to real money accounts' desire for the tenor, which has not been seen in senior bank debt in a long while.
The 10-year piece, priced at 235bp over US Treasuries, came cheap compared with the bank's 2022s, but the tranche has rallied in the secondary market to a 220bp spread, 15bp tighter than its reoffer price.
Bangkok Bank's offering seemed to be the exception to the rule in today's markets. The 5-year piece stayed flat in the secondary market at 190bp, where the bonds were priced.
Meanwhile, the GS Caltex 2018s are about 3bp wider from its issue price of 190bp with indications at 193bp/191bp. Woori Bank, which sold its 2018s last night at 160bp initially saw support in the morning with indications at 161bp/159bp, but later the bid for the securities collapsed. Quotes on the issue were wider later in the afternoon to 163bp/161bp.
A major factor in the underperforming Korean paper is the expectation that Korea will be issuing more securities. In addition to Korea Hydro already in the market today, market participants say at least one to two more Korean names are likely to emerge next week.
Financial institutions NH Bank and Kookmin Bank were speculated as potential candidates, although they were unlikely to seek large deals.
Despite the heavy volume, Korean credits have not underperformed that badly. "The Korean paper still gets pretty good support from the locals, so once the bonds widen to a certain level, the locals come in to pick up what they feel is good value," said a Singapore-based trader.
With much of the focus today on IG bonds, the high-yield secondary markets were going through a trough. "It's very quiet out here in the secondary market," said one high-yield trader. "Country Garden may be out with a deal, but it has not had any impact yet on the sector."
Despite the lacklustre trade, Greentown's new 2019s were rallying to 100.5/101.5, up from its par reoffer price.
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