ASIA CREDIT CLOSE: Investors get confident and put money to work

Last Updated: Fri, Nov 30, 2012 18:44 hrs

SINGAPORE, Nov 30 (IFR) - Politicians and investor confidence are two words not often seen together, but lately, that has just been the case as investors are beginning to feel more comfortable with officials in the United States and Europe.

The uncertainty about what decisions politicians would make in the developed world that had rattled the market for the past three years seemed to have suddenly abated and investors are finally returning to business as usual.

The week was rife with positive news from the West, with home sales rising in the US, a Greek debt package that postpones any reckoning at least until the end of the first quarter, and signs that the fiscal cliff will be averted. As investors brushed away political fear, they started to put money to work again.

"This market is going to continue for a while, there is still a lot of loose cash out there," said a portfolio manager in Singapore.

She was not alone in her views. Speaking at the Reuters investment 2013 outlook summit last Thursday, Ewen Cameron Watt, chief strategist at the BlackRock Investment Institute, said aggressive monetary and policy action had effectively insured the liabilities of several key financial systems, raising prospects for markets to surprise on the upside next year.

"Here we are in the fifth year since Lehman, we've had over USD10trn of central bank balance sheet expansion, more than 400 interest rate cuts and massive fiscal stimulus," Cameron Watt said. "There's USD1.7trn of investor cash on the sidelines. It is not going to come back in one go ... It's hard to think that world is going to grow very fast but a grinding bull market is possible."

Signs of that bull market were already being seen this week in Asian credit. The Asia iTraxx IG Series 18 is ending the week 6bp tighter quoted at 109bp/111bp. "We were steadily tightening 2bp-3bp a day," said a trader in Singapore. "I feel like we have made all the buying for November in the last two days of (this) week."

The move pushed bond prices higher, with most of the demand on the cash side focused on Indonesia, which had underperformed in November. The 2022 bonds ended the week up by USD1.5 in price terms at 107.75/108.00 while the 2042s finished 60ct higher at 117.25/117.75.

Mongolia's new bonds also benefited from the buying interest and the 2018s ended the week at par while the 2022s were at 100.50/100.75. The bonds had initially rallied out of the box, trading as high as 101.00 and 101.50 respectively on Thursday. However, during the US session real money accounts dumped some of them and caught brokers unexpectedly long so they scaled back, though they were still steadily above reoffer.

Other new issues did even better. CDB Leasing's 2017s ended the week at 117bp/118bp over US Treasuries and the 2022s were at 149bp/150bp from reoffer spreads of 145bp and 170bp respectively. China Cosco's guaranteed 2022s priced on Monday were also closing the week at 214bp/211bp, 38bp tighter than the reoffer spread of 250bp.

The underperformer was Olam. The bonds of the Singapore commodities trader were hit as its confrontation with short seller Muddy Waters escalated. The dollar-denominated 2017s ended the week around 83.00, USD5 weaker in the week and some USD13 lower than where they were just three weeks ago.

Apart from that, the market was mostly positive. Bonds of the Philippines also strengthened in the short end, with the 2022s ending at 102.50/103.00, having been issued at par on November 8. However, the long end was under pressure amid rumours that one fund was selling as much as USD30m of 2034s. The 2037s, the most liquid in that part of the curve, closed the week USD1 down at 120.00, while the 2034s closed only some 25ct weaker in price around 140.00

The same fund was heard selling some of its sovereign bonds in Indonesia too. There was ample buying interest to offset the impact of the sales. Yet, a trader in Singapore suggested the move by the fund was a smart one and should probably be emulated by others in the market.

He was betting that there is a 90% chance of the US fiscal cliff - one of the main tail risks recently - being averted. In that case, he speculated, the Treasury yields could move 10bp-15bp higher, especially in the long end. That would spell significant paper losses for holders of long-term sovereign bonds in Asia.

For instance, if the yield on the 30-year Treasury were to rise by 15bp, Indonesia's 2042s would have to drop USD3 in price only to reflect the move on the benchmark. In that case, exposure to spread products makes more sense since a sharp move in US Treasuries would translate into gains.

However, the move by the unknown fund could also be a sign of something else. Some investors are simply not that comfortable with the potential risks yet. That assumption would find some backing in the recent move in US Treasuries. Even as spreads were tightening and high-yield bonds gained some USD2 on average in Asia last week, the yield on the 10-year US benchmark tightened 7bp.

Usually it would be the opposite, as risk markets gain, Treasury yields should be rising. This however, was a result of what one investor described as a conundrum. "Investors are in a tug of war, as you come to year-end there is the usual cyclical need to invest cash, but there still is some risk," said Rajeev de Mello, head of Asian fixed income at Schroders.

The trader who said there was a high chance of the fiscal cliff being averted reckoned that if it is not, Treasury yields could easily rally 30bp and spreads in Asia could widen some 50bp. Given that everyone seems to be banking that this scenario will not pan out, the potential widening is much higher.

In fact, recent history has a good example. Last year, in the month following July 25, when it became clear that the US downgrade by S&P - which happened on August 6 - was inevitable and the Congress debate about the debt ceiling seemed at a standstill, Treasury yields rallied 100bp. The iTraxx Asia ex-Japan IG index widened 50bp in the same period.

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