ASIA CREDIT CLOSE: Geopolitical fears rattle credit spreads

Fri Aug 8, 2014 5:12am EDT

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HONG KONG, August 8 (IFR) - Investors unnerved by geopolitical tensions prompted a broad sell-off in Asian investment-grade and high-yield bonds today.

The Asia ex-Japan IG iTraxx index widened about 4bp to 115bp on Friday, its highest level since May.

The worries stemmed from US President Barack Obama approval's of air strikes in Iraq to protect American personnel from Islamist militants and from reports that no solution was in sight for Ukraine as Russia troops massed on the border, Yields on 10-year US Treasuries tightened 6bp overnight.

"Usually Asian credit spreads don't keep up and widen faster when we see a dynamic rally in US Treasuries," according to a credit analyst based in Singapore.

"We did have some froth in the markets so it's good to shake out weaker hands. Sentiment was better in the afternoon."

Traders saw both real buying and short covering towards late Friday afternoon, but bonds from Chinese state-owned enterprises have widened 30bp since the beginning of the week.

Investment-grade bonds such as CNOOC and Sinopec's liquid 2024s were trading wider at 160bp/158bp levels, while spreads on Korean bonds also moved out as much as 7bp. Indian IG spreads widened 10bp.

Jittery sentiment forced USD770m worth of emerging market-dedicated bond funds to exit in the week to August 6, ending six straight weeks of inflows that were driven by hard currency bond investments, according to data from EPFR Global and Barclays Research.

This is the first week in four of hard currency bond fund outflows, reflecting a similar direction in the US high-yield bond funds.

Meanwhile, Japan's benchmark Nikkei 225 dropped 454 points to close under the 15,000 level. Hong Kong, Taiwan and Korea also closed in the red.

Debt syndicate bankers said issuers have been delaying bond sales this week because of the unsettled credit markets, but they will be watching closely for a positive turn.

frances.yoon@thomsonreuters.com

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