SINGAPORE, June 7 (IFR) - A correction that began three
weeks ago in reaction to a spike in US Treasuries snowballed
into a full-blown sell-off on Friday as fear became the main
driver of behaviour of investors and traders.
"Until last week, this was a rates-adjustment sell-off and
you were seeing mostly Double A and Single A names selling off,"
said one credit analyst in Hong Kong. "In the past couple of
days, the selling turned into a full risk-off move and
everything is going down."
The analyst noted that Triple B bonds had been more
resilient at the beginning of the sell-off as they were less
correlated with Treasury yields.
As a result, Indian names were widening less than Chinese
state-owned entities. However, they have caught up in the past
few days. The 2018s of State Bank of India are now 28bp wide to
where they were on May 20.
Even some traders have started to admit that the sell-off
may be overblown and that it is the result simply of herd
mentality, as investors raise cash afraid of redemptions and
dealers lower their bids to avoid getting hit.
"It looks like we are going to overshoot to the downside; at
this stage, some of these levels are starting to look
attractive," said one trader.
Much of the fear stems from the fund flows numbers the
Emerging Portfolio Fund Research released. The fund tracker
indicated last week that emerging markets dedicated bond funds
saw their first net outflow in almost a year. That movement
accelerated this week with the total amount withdrawn from the
asset class hitting USD1.52bn.
One banker said, though, that amid the recent data, his
institution had gone out and surveyed almost 70 large global
asset managers that dedicated investments to Asia. According to
his shop's survey, most have not yet seen the outflows that have
been pictured in the EPFR numbers.
He said this was a reflection of the limited universe EPFR
followed as it tracks mostly US-based mutual funds and depends
on flow data that these investment managers volunteered.
In spite of remaining safe from redemptions, this banker
said that asset managers were raising cash because the EPFR
numbers reminded them that they could soon see clients
withdrawing their money. "It's just herd mentality; the big
guys, the ones that really matter, are not seeing outflows yet,"
the banker said.
Friday was the perfect example of how the market has become
a laboratory for behavioural finance. Investment-grade credits
opened the day about 1bp tighter and held there for much of the
About an hour before lunchtime, though, one investor decided
to unload a small amount of 2022 bonds of Korea Development Bank
and Korea Export Import Bank. As the bids on the street for
those bonds got hit, immediately traders became defensive and
dropped their bids some 10bp in the most liquid bonds.
The lower bids, in turn, caused the whole credit market to
be repriced wider. As a result, the Asia iTraxx is closing the
day at 131bp mid-market, 3bp wider in the day. Most liquid
investment-grade credits are 5bp to 10bp wider in spread terms.
"But if you are looking for a real bid, you can consider
that 15bp to 20bp," said one trader in Singapore. There were
hardly any trades, though, as "no one is willing to buy,"
according to one trader.
Bankers are now hoping that the nonfarm payroll numbers in
the US, due out later today, come in weaker than expected. That
could prompt a rally in Treasuries and reverse some of the
losses being seen in investment grade.
The trouble, though, is that fear has already set in. One
banker in Singapore said that, even a rally in Treasuries, was
unlikely to cause a full retracement of the recent widening.
"Even the US jobs number has become less important, there
has been a deterioration of the market that cannot be reversed
simply by a rally in Treasuries," he said.
In the words of a Singapore trader: "Brace yourself."