SINGAPORE, March 8 (IFR) - Asian credit markets endured a
rocky start to the week but quickly recovered as investors
remembered that almost every central bank in the world is
running its printing presses at full speed.
The market also got a boost from the Dow Jones Industrial
Average hitting an all-time high and from expectations of strong
nonfarm payroll data in the United States on Friday.
The reverse side of that, however, was that US Treasury
yields spiked as well with the 10-year again breaching the 2%
level, a 16bp rise on the week. It was no wonder traders were
seeing very little interest from accounts in long-end
"I had one account tell me: 'I'll buy the five-year at this
price but for the 10-year I am selling - I am a bit concerned
about Treasuries,'" said one trader in Singapore.
Indeed, a further rise in the US benchmark could have
detrimental effects, especially on longer bonds. The steep price
drop that could ensue might force those that bought the bonds on
margin to sell them. For instance, the many private banking
accounts that have bought some of the long-dated
Temasek's 2042s may be the perfect example of that dynamic.
The bonds were issued in July last year at 97.653 to yield 3.5%,
or a spread of 95bp over the 30-year US Treasury.
However, as the yield on the US benchmark has risen
significantly since, the bond's price has dropped to the 90.00
mid-market at which it was quoted on Friday. Yet, on a spread
basis, Temasek's 2042s are tighter, quoted at 73bp over.
Besides private banking accounts that buy on margin, such a
move could also force some long-only funds to sell the bonds as
they cannot buy spread products to hedge the price drop on the
Curiously, though, traders were reporting that it was fast
money rather than the real money accounts shorting the long end
of investment-grade. The move to shorten duration was causing
the curves on the more liquid bonds to steepen, and the long end
of both Indonesia and the Philippines underperformed.
By the end of the week, Indonesia 2042s and the Philippines
2037s were both down about USD1.7 in price terms and the spread
difference between the 10-year and the 30-year benchmarks for
both sovereigns had increased by 5bp-10bp.
Initially, Indonesia widened more than the Philippines as
investors positioned themselves for a large transaction from the
sovereign, expected as early as next week. However, by Thursday,
some of the shorts were pared and the spread between Indonesia
and the Philippines ended the week some 5bp tighter.
The CDS for Indonesia followed a similar path, widening
initially but tightening later in the week. By Friday, the
five-year protection on the sovereign was unchanged on the week
The Asia iTraxx ex-Japan IG index saw a much better
performance, clearly signaling that those that can hedge against
a spike in investment-grade yields are doing so in Asia. The CDS
composite ended the week 10bp tighter, quoted at 102bp/100bp on
Traders and analysts said that investors were still buying
short-dated bonds, even though they were piling into CDS and
selling the longer high-grade names. "People are spooked about
the 10-year (Treasuries) but there still is buying of short
stuff," said one trader.
Perhaps the best example of that trade was given regional
insurer AIA Group's new bonds. Its debut two-tranche
transaction's 10-year portion finished the week at 135bp/137bp,
having printed earlier in the week at 130bp over Treasuries.
Meanwhile, the five-year part closed the week at a 108bp
mid-market spread, 2bp inside the 110bp reoffer level.
With stocks moving up and investors fleeing long-dated
high-grade, the obvious trade was to add high-yield exposure,
and fast money guys were seen doing just that. There was renewed
demand for some of the most beaten-up bonds in the Chinese
property sector, such as Soho China, which saw its 2017s gain
USD1 in the week to close at 99.75 on Friday.
The gains came in spite of announcements last week that the
Chinese government was taking steps to curb property
appreciation. While the talk pushed property stocks lower by as
much as 10% on Monday, they had little effect on the bonds of
the same companies. Some lost ground on Monday, but by Friday
the whole sector had recovered the losses and was some 25ct
higher in price terms.
Again, China Vanke's new bond exemplified the resilient bid
for debt from the sector. The company priced a five-year USD800m
bond at 195bp on Thursday that closed on Friday quoted at 183bp.