SINGAPORE, Jan 11 (IFR) - Credit markets were already
showing some signs of
supply fatigue today with the last batch of new issues failing
to perform and some of the more traded sovereigns losing ground.
However, even as more than USD12bn has been printed since
the start of the year in the dollar market, real money accounts
remained bullish, betting that lax central banks will continue
to support buying in the credit markets.
"Policy makers are doing a lot to create stability," said a
fixed income portfolio manager for a large real money account.
They seem to have succeeded.
Last week saw the CBOE's Volatility Index, VIX, hit its
lowest since June 2017.
Steady markets and lots of money could only result in
positive results. In fact, this portfolio manager pointed out
that secondary markets have actually underperformed when gauged
against the size of the orderbooks seen in the primary markets.
"The year started off very strong with a lot of cash that
accumulated in the last four weeks of the year looking to be
invested," he said.
Indeed, inflows to emerging markets bond funds continued
stronger than ever.
According to EPFR, EM bond funds took in USD2bn in the week
ended January 9. That followed USD1.3bn of inflows in the prior
week and USD38.8bn last year.
So much money opened the door even for the issuance of bonds
that inconceivable a few months ago, such as a subordinated perp
from a high-yield Chinese property company and a Triple C rated
bond. Yet, even as real money accounts recognize the frothiness
of the market, they continued to invest.
"Don't fight the technicals, this is herd mentality, but you
cannot fight a herd," said one portfolio manager for a hedge
fund in Singapore.
As mass mentality goes, most of the new issues performed
well. Sun Hung Kai's 2023 bonds issued on Monday at 180bp over
US Treasuries were ending the week at 168bp/163bp, showing that
investors had completely overcome the concerns about charges
being pressed by Hong Kong authorities against the company's
co-chairmen Raymond and Thomas Kwok.
The Triple C rated 2018s issued by Hopson Development -
which just five months ago was considered a prime candidate for
default - ended the week at 101.00/101.75 having priced at par
on Wednesday. The new 10-year bonds priced by Indian newcomer
Power Grid Corporation rallied to 204bp/206bp after printing the
tightest coupon ever in 10-year dollars and an enviable spread
of 210bp. Kookmin Bank's new three-year bond was ending the week
quoted at 98bp/94bp having printed at 105bp earlier in the week.
For all the giddiness, though, investors were starting to
show some signs of fatigue. By Friday, the issues printed on
Thursday were not performing so well, with the exception of
Power Grid Corp. Even that, however, was showing lacklustre
performance compared to the rally staged by India Export Import
Bank, which priced a 10-year bond at 220bp on Monday which was
traded at 202bp/199bp on Friday.
Traders were reporting private banking and fast money
accounts taking profits, while real money seemed to have started
unloading some of its current bonds to make up space for what
some believe may be up to USD30bn in supply this month.
As a result, the five-year bond priced by Lai Sun
Development ended the day quoted at 99.75/100.25 after pricing
at par on Thursday.
The other sign of fatigue was coming from the most liquid
section of the Asian credit market. Sovereign bonds of Indonesia
sold off on the back of concerns about the stability of the
rupiah but also as investors took profits.
The 2042s closed the week at 111.50, four points down from
Monday. The five-year CDS for the sovereign ended the week 32bp
wider at 150bp.
The rout in Indonesian paper hit its neighbour Philippines,
and the 2037s closed the week 118.35/118.65, while the
protection for the sovereign was at 106bp, having traded at 98bp
"We are back to September levels," noted one
trader in Singapore.
There was a sell-off in the bonds of Zoomlion as well,
though that more a result of renewed accusations of channel
stuffing against the company. Yet, its 2022 bonds, which traded
below par at one point, were back at par by the close of the
The bout of selling had analysts worried, with some saying
that spreads could easily gap out anytime.
"If things turn around this could become a puke fest
very quickly," said one analyst in Hong Kong.
For the time being, though, investors continue to see reason
to buy. One portfolio manager said that the announcement that
the BIS had eased liquidity requirements for Basel III and the
Bank of Japan's announcement of more balance sheet growth were
additional proof that monetary conditions are going to
continue easy for a while.
"We are getting good data news, the Europeans have been good
at reducing the tail risk, the BoJ is easing further and the Fed
has just started its MBS purchases," said the Singapore
"I don't think things are going to change significantly