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