ASIA CREDIT CLOSE: Short squeeze prompts pre-CNY bounce

Last Updated: Thu, Feb 07, 2013 09:30 hrs

SINGAPORE, Feb 7 (IFR) - A bout of short covering ahead of the Chinese New Year provided a bounce to credit markets today, reversing some of the recent losses of the asset class. The gains, however, seemed to have little fundamental support apart from the need to deliver paper shorted in the past two weeks.

The Hang Seng Index, for instance, closed down 0.3% weighed down by Chinese financials after the People's Bank of China indicated that it would shift its focus back to fighting inflation from spurring growth.

The bad news on the economic front hardly affected credit, though. Further evidence of a short squeeze was provided by the China property sector. Bonds from the likes of Country Garden hardly moved, closing at 101.00/102.00 even as press speculation has increased that the central government will move to curb property price appreciation again. "I wouldn't put much faith in today's rally, this is just people trying to flatten out shorts ahead of the long holiday," said a credit analyst in Singapore.

Another strategist in Hong Kong added that the lack of supply in the past week has also helped support the market. "We have finally had some room to breathe and spreads have tightened a bit," he said. That helped Reliance recover a bit more ground and its perpetual notes ended about 50ct higher in price quoted at 96.00/97.00, still below the par reoffer, but much better than the 94.50 low they hit last week. Agile's perps also gained a bit of ground closing at 92.00/93.00, about USD1 stronger compared to Monday.

Sovereign paper bounced as benchmarks in the region caught up with the recent gains in the Treasury market and also as investors removed some of their bearish bets. The Philippines curve ended about USD1 higher in price terms on average, with the 2037s closing at 113.25/113.65 and the 2021s wrapping at 109.85/110.15. Indonesia also gained and the 2022s closed at 103.15/103.65 while the 2042s finished at 108.25/108.75. CDS for both sovereigns, though, ended unchanged as did the iTraxx IG index at 116bp.

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