SINGAPORE, Feb 22 (IFR) - Credit markets in Asia staged a small rally last week as lack of supply gave investors confidence to put some money to work and squeezed short-sellers.
Investment-grade bonds tightened 5bp to 10bp across the board and high-yield gained USD1-USD2 in price, with some of the most beaten recent issues returning to reoffer levels. “People were expecting a lot of supply and it didn’t materialise so they started to put some money to work in the secondary,” said one trader in Singapore.
Most of the activity was in cash bonds, in a clear demonstration that interest was genuine. The Asia iTraxx IG ex-Japan CDS index offered evidence of that as it ended the week unchanged, quoted at 108bp/110bp, even as the bonds of most of its components tightened in spread terms.
Traders reported interest from institutional accounts, especially in select investment-grade names. “Real money were really persistent buyers,” said another trader in Singapore.
Malaysian bank bonds, for instance, were lifted some 10bp tighter by the end of the week as investors realized the underperformance of the sector was overdone.
Indian banks also found stronger interest by the end of the week as investors positioned for the budget announcement in New Delhi on February 28. As a result, the 2017s of State Bank of India ended the week some 10bp tighter, last quoted at 223bp/218bp, while ICICI Bank’s five-year was 15bp tighter, quoted at 245bp/240bp.
Hong Kong property developers also saw their debt tightening 10bp-15bp on average in the five-year space as fears of a new bout of issuance from the sector were tamed. “Supply, supply, supply, that’s all that matters right now,” said the Singapore trader. “The market is highly technical,” he added, referring to the balance of demand and new deals.
The same dynamic, though, worked against Indonesia. The republic has mandated a new two-tranche USD2bn transaction which is widely expected to hit the markets in the next few weeks. As a result of those expectations, Indonesia has underperformed and its bonds ended the week some 2bp wider while the Philippines saw its own debt tighten in some 3bp.
Part of the support seen for investment-grade names, though, was merely a reflection of the U-turn in US Treasury yields. After flirting with the 2.1% level, the yield on the 10-year US benchmark retreated to 1.97% by Friday.
The move tighter accelerated especially at the end of the week, after the Fed minutes showed growing calls by governors to curtail monetary stimulus before 2014.
The concern about countercyclical measures weighed on stock markets and the S&P 500 index dropped 0.63% on Thursday, pulling it back from near all-time high levels.
In spite of the equity market performance, though, high-yield in Asia did well in the week, with most of the bonds ending USD1-USD2 higher in cash terms. Some of the perpetual bonds that were hit recently also recovered and Reliance was over 99.00 by the end of the week, close to its par reoffer.
Perps with high step-ups, such as Petron‘s, did much better and its bonds ended just below 106.00, having priced in January at par.
Even the embattled Chinese property sector found some solace and the likes of KWG (see chart) saw its bonds recover to pre-Lunar New Year levels. “Because of earnings season in China, we will not see many issues until mid-March,” said a hedge fund manager in Singapore. “The market is constructive.”
However, investors are not feeling fully comfortable either, even as they realize that they have money to invest in the secondary market.
Portfolio managers said they were watching closely the outcome of the Italian elections, as a victory of Silvio Berlusconi’s People of Freedom party could prompt a consolidation in the market. The former prime-minister has been promising to cut taxes if he wins, something that could revive investor concerns about the debt sustainability of the country.
Some analysts also mentioned the potential budget sequester, which could happen in March, as something that could reverse the recent rally. However, if neither of these materialise, bond investors could see additional gains in the secondary.
That is, at least until the next bout of issuance starts. After all, it is all back to supply and demand. “In January, nobody could foresee the amount that was going to be issued, so there was some indigestion by the end of the month,” said a Hong Kong banker.
Now, he added, everybody had positioned for a flurry of deals and when that did not happen they were forced to get their cash back into the market.