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 on Monday.
"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 week.
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 portfolio manager.
"I don't think things are going to change significantly anytime soon."