SINGAPORE, Dec 7 (IFR) - Asian markets tightened in the past
week amid thin liquidity as money has continued to flow into the
region and the new issue activity has slowed down. While CDS
ended slightly wider, most corporate bellwethers in the region
ended the week on a positive note.
In fact, there seems to be a growing consensus among
analysts that there is little upside left on sovereign paper in
Asia and this has seen the focus turn more to company debt.
This would explain the underperformance on the derivatives
side, which is the realm of sovereigns. The Asia iTraxx IG
Series 18 closed the week some 2bp wider quoted at 111bp-113bp.
Much of that move, however, happened on Wednesday, when
uncertainty about the fiscal cliff and a steep drop in Apple
stock put some pressure on higher beta asset classes.
Overall, though, the index, as well as the underlying CDS,
was stuck in a range for most of the week. "This was a typical
NFP week," summarized one analyst, referring to the wait-and-see
stance often adopted by investors ahead of the monthly
employment numbers in the United States, which were due on
Friday. Yet, there was steady buying, albeit not in volume, all
week long. "All I saw was buying," said one trader.
If the year-end and the expectation of important economic
news sapped liquidity, there still was more activity than at the
same time last year. Traders said that institutional investors
were picking up select names, as they sought out value-trades
instead of just buying indiscriminately. Chinese
investment-grade names were in favour, especially technology
Tencent was one of those names where investors seemed to be
finding hidden value. The Chinese service portal's bonds due
2018 ended the week almost 15bp tighter quoted on Friday at
203bp/193bp. "The company has net cash and it generates a lot of
revenues so people realized it was undervalued," said one
E-retailer Baidu, meanwhile, was getting the other end of
the trade and it closed the week 6bp wider with the recently
issued 2017s traded at 145bp/140bp and the 2022s wrapping at
184bp/179bp. The bonds remain tighter than reoffer spreads of
160bp and 185bp over US Treasuries, but they have lost much of
their lustre in the past week.
As has been the norm lately, though, most of the activity
centred around the new issues. On that front, investors were
sending a clear message that new issue premiums are now
mandatory. Without them, the bond will underperform.
For instance, the US$650m five-year bond by Hon Hai which
printed at 165bp over on Thursday ended Friday at 160bp/163bp
having rallied on the break to as tight as 154bp before a round
of profit-taking sent them back close to reoffer.
The deal offered some 20bp of pick-up over some of its comps
according to analysts, so investors were happy to continue
buying in the secondary.
Keppel Land's US$250m unrated five-year bond told the
opposite story as it closed the week quoted at 285bp/275bp over
the five-year US Treasury, some 20bp wide to the reoffer spread.
Away from new issues and value trades, traders were busy
mostly with headline activity. Reports that one of the parties
could drop out of Mongolia's governing coalition sent the newly
minted bonds of the sovereign into a tailspin (see chart). In
one day, they dropped US$7 in price and by Wednesday afternoon
the 2018s were quoted at 93.50 and the 2022s at 94.50.
Clarifications by the government that the party was yet to
quit the coalition and a sense that the bonds were oversold
prompted a pop back and the 2018s ended around 97.50 while the
2022s were at 98.50.
In the high-yield space, Chinese developers continued to
gain ground as more of them reported sales that met their annual
targets. "It seems like 8% is the new average yield for the
Single B companies in the sector," said one analyst in
Overall, the bonds of most companies from that space gained
50ct in price on average and Longfor 2016s, one of the
bellwethers, ended quoted at 110.00/111.00.
Given the strong inflows to EM bonds funds - EPFR reported
the asset class took in another US$1.02bn in the week ended
December 5 - and the lack of supply, traders and analysts are
betting that the tightening trend will continue. "It is very
tricky to go short anything right now," noted one trader in
Add to that some year-end window-dressing, which should
start next week, and up seems like the only way to go. "Accounts
have not even started to position for the year-end, the recent
buying was just cash being put to work," said the trader.
To be sure, investors will continue to be picky, especially
given the build-up in uncertainty around the fiscal situation in
the US. Ultimately, though, that could still benefit
investment-grade corporate credits in the region.
"If the US falls off the fiscal cliff, Treasuries will rally
and that will mean even lower yields in the West, which should
make Asia more attractive," said an analyst in Hong Kong.