SINGAPORE, Sept 16 (IFR) - Bond investors turned bullish
today on news that Lawrence Summers had dropped out of the race
to take over as Federal Reserve chairman.
Summers is widely seen as a hawk and the market was pricing
in a tightening stance after he took over. His exit prompted a
rally in Treasury futures this morning and Asian credit
responded in similar fashion.
The sudden move caught many dealers short and, as they
scrambled to cover positions, they added fuel to the rally. "The
Summers news was the catalyst and it helped flush out some of
the shorts," said one trader in Singapore.
Bonds gained fast and, as of 09:30 Singapore time, the Asia
ex-Japan IG iTraxx Index was being traded at 131bp, 11bp tight
to the 142bp at which it closed on Friday. It held up at that
level into the close.
Cash was also boosted and some of the longer-tenor bonds
that have higher correlation to Treasury moves saw sharp
repricing moves. The 2043s of Pertamina, for instance, were bid
at 78.50 by the close, while they ended last week being quoted
"People have realised it may be a very benign Treasury
environment until the end of the year and they are reevaluating
their IG holdings," said the trader, adding that funds still had
cash holdings in the high single digits, above historical
averages, and, therefore, had money to deploy.
Overall, investment-grade cash bonds were 7bp-11bp tighter
in spread terms across the board as investors sought to get long
again on better-rated credits to ride a potential rise in
"I had accounts looking for 5-year Indian corporate paper at
350bp over Treasuries, which you could not have sold for 425bp
three weeks ago," said another trader, adding that there were no
offers of the paper and that investors were seeking corporates
as bank paper from India had vanished.
High yield was also benefiting from the strong tone and some
of the bellwethers of the asset class, such as Country Garden
2017s, were up USD2 in price terms.
The upbeat tone was also being reflected in the primary
market, where a new USD300m 5.5-year dollar bond from Greentown
had already amassed USD5.5bn in demand.
Some analysts and traders, however, remained sceptical about
how long the rally could continue. "You can call me a China bear
for the rest of the year," joked one analyst.
One trader in Singapore said he feared that issuers might
cap the upside for the secondary as they came to the market to
take advantage of the recently rediscovered appetite for bonds.
"Issuance could cap gains, if investors are inundated with new
bonds," he said.
Another trader suggested that the same positive tone that
the exit of Summers from the Fed run caused could be reversed
with a hawkish statement from the FOMC when it finished its
monetary policy meeting on Wednesday. "Everything could change
on Wednesday again," he said.