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 That movement accelerated this week with the total amount withdrawn from the asset class hitting USD1.52bn.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 morning.
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."