ASIA CREDIT CLOSE: Spreads rally amid illiquid trading
SINGAPORE, Dec 19 (IFR) - US Federal Reserve chairman Ben Bernanke's surprise announcement yesterday of the start of tapering had a positive effect on spreads initially.
Investment-grade cash bonds in Asia closed the session about 2bp-5bp tighter across the board.
That mostly offset a 6bp rise in Treasury yields overnight on the following the announcement that the Fed was scaling back its monthly asset-purchase programme to USD75bn from USD85bn.
The move, however, happened amid almost no trades, suggesting that the spread compression was not happening because of buying interest in Asian investment grade.
Instead, because there was no liquidity, high-grade bond prices were not moving fast enough to reflect immediately the move in benchmark yields.
The lack of activity was profitable only for the mental health of traders, who, instead of scurrying to cover short, were heard going for long lunches as there was little client interest in doing business.
One trader, spotted having a boozy lunch in town, predicted that the market would only start reflecting the impact of Bernanke's announcement in January.
"There is some bidding by retail, only bits and pieces, but most people have already left for the Christmas," said a trader, who was pinned to his desk covering for his two counterparts already away for the holidays.
The trader speculated, though, that some institutional accounts might be hard pressed to cut short their vacations or start looking at their smartphones again. "A lot of people did not expect Bernanke to do anything in this meeting," he said.
Indeed, just last week only 12 of 70 economists Reuters had surveyed expected the Fed to start tapering yesterday. The initial reaction to the move, however, was not negative and stock markets rallied in the US.
The trend was not completely emulated in Asia, where the Nikkei Index closed 1.74% higher as the yen dropped, but the Hang Seng Index dropped 1.1%.
The CDS market did show strong gains as dealers celebrated the strength of the US economy to prompt the Fed's move.
The Asia ex-Japan iTraxx index ended the day about 4bp tighter, quoted at 123bp/125bp, having started the day sold at 123bp just to lose some ground in the early afternoon.
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