ASIA CREDIT CLOSE: Philippines tests new tights, iTraxx near resistance

Last Updated: Thu, Oct 18, 2012 09:50 hrs

SINGAPORE, Oct 18 (IFR) - Philippines five-year CDS is testing the limits of how tight it can go and has continued its downward trend after breaching the key 100bp level earlier this week for the first time in history. It was closing the Asian session today at 92bp/96bp.

The sharp move in the sovereign this time was followed by other liquid derivative benchmarks in the region with Indonesia's 5-year protection tightening some 4bp to end at 118bp-122bp. That move, in its turn, helped pull the Asia IG iTraxx index in by almost 5bp and the last quote in the market was 114bp.

A trader in Manila said that the CDS move was being prompted by foreigners increasing exposure to the sovereign at a time when its bonds are ever harder to find. Indeed, Philippines 2021 dollar bonds are trading in the 113.25-113.50, little changed today. That equates to a yield of 2.2%, or a spread of less than 40bp over the 10-year US Treasury.

The sovereign is still rated at Ba2/BB+/BBB-, hence below investment-grade, yet its bonds are trading at half the spread of Brazil's, which is rated two notches higher. "There is a lot of froth," noted one trader.

Yet, there is room for more tightening, judging by historical levels. The index, for instance, has breached the 100bp level a couple of times in the past three years, so it could narrow some 15bp more. And if the Philippines basis is to converge to neutral, either the bonds will have to widen or the CDS to tighten.

The former would make more sense, given that most of the spread tightening was due an increase of almost 20bp in the yields of the 10-year US Treasury which was not followed by the Philippine sovereign bonds because the locals which hold them hardly ever sell. "The 2021s are mostly owned by locals," said the trader.

The overall bullish tone also buoyed the recent new issues, with PLN 2042s continuing their rally. They were last quoted at 102.50, a full USD4 above the reoffer level of 98.514 printed in the beginning of the week. Korea Expressway's bonds priced on Monday were 10bp tight to the reoffer spread of 130bp.

The new bonds of Yuzhou gained USD2 in the secondary amid heavy two-way flow, as all the selling by flippers was met by demand from underallocated accounts. "It is a bull market," summarized one trader.

The continuation of it seems hinged on a positive outcome of the European summit that started today. If Europe is seen as making further progress on its drive to a fiscal union, investors could finally start putting some of the money they have been hiding under the pillow to work.

The United States is already doing its bit, and much of the rally seen today was the result of positive housing numbers last night in the world's biggest economy and a string of better than expected corporate results.

Indeed, the iTraxx has been consistently trading below its 100-day moving average and is on the edge of the two-standard deviation bollinger band of the seven-day moving average. It has breached that weekly resistance twice this week.

It is drawing near the same bollinger for the 100-day moving average, which now sits at 108bp and is a stronger resistance. The next resistance is below 100bp.

In short, unless some bad news hits, there is room for more. Even if it is increasingly looking like what Alan Greenspan once called irrational exuberance.

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