ASIA CREDIT CLOSE: Spike in Treasuries spooks investors

Last Updated: Fri, Mar 08, 2013 09:50 hrs

SINGAPORE, March 8 (IFR) - Asian credit markets endured a rocky start to the week but quickly recovered as investors remembered that almost every central bank in the world is running its printing presses at full speed.

The market also got a boost from the Dow Jones Industrial Average hitting an all-time high and from expectations of strong nonfarm payroll data in the United States on Friday.

The reverse side of that, however, was that US Treasury yields spiked as well with the 10-year again breaching the 2% level, a 16bp rise on the week. It was no wonder traders were seeing very little interest from accounts in long-end investment-grade bonds.

"I had one account tell me: 'I'll buy the five-year at this price but for the 10-year I am selling - I am a bit concerned about Treasuries,'" said one trader in Singapore.

Indeed, a further rise in the US benchmark could have detrimental effects, especially on longer bonds. The steep price drop that could ensue might force those that bought the bonds on margin to sell them. For instance, the many private banking accounts that have bought some of the long-dated investment-grade bonds.

Temasek's 2042s may be the perfect example of that dynamic. The bonds were issued in July last year at 97.653 to yield 3.5%, or a spread of 95bp over the 30-year US Treasury.

However, as the yield on the US benchmark has risen significantly since, the bond's price has dropped to the 90.00 mid-market at which it was quoted on Friday. Yet, on a spread basis, Temasek's 2042s are tighter, quoted at 73bp over.

Besides private banking accounts that buy on margin, such a move could also force some long-only funds to sell the bonds as they cannot buy spread products to hedge the price drop on the bond.

Curiously, though, traders were reporting that it was fast money rather than the real money accounts shorting the long end of investment-grade. The move to shorten duration was causing the curves on the more liquid bonds to steepen, and the long end of both Indonesia and the Philippines underperformed.

By the end of the week, Indonesia 2042s and the Philippines 2037s were both down about USD1.7 in price terms and the spread difference between the 10-year and the 30-year benchmarks for both sovereigns had increased by 5bp-10bp.

Initially, Indonesia widened more than the Philippines as investors positioned themselves for a large transaction from the sovereign, expected as early as next week. However, by Thursday, some of the shorts were pared and the spread between Indonesia and the Philippines ended the week some 5bp tighter.

The CDS for Indonesia followed a similar path, widening initially but tightening later in the week. By Friday, the five-year protection on the sovereign was unchanged on the week at 131bp.

The Asia iTraxx ex-Japan IG index saw a much better performance, clearly signaling that those that can hedge against a spike in investment-grade yields are doing so in Asia. The CDS composite ended the week 10bp tighter, quoted at 102bp/100bp on Friday.

Traders and analysts said that investors were still buying short-dated bonds, even though they were piling into CDS and selling the longer high-grade names. "People are spooked about the 10-year (Treasuries) but there still is buying of short stuff," said one trader.

Perhaps the best example of that trade was given regional insurer AIA Group's new bonds. Its debut two-tranche transaction's 10-year portion finished the week at 135bp/137bp, having printed earlier in the week at 130bp over Treasuries.

Meanwhile, the five-year part closed the week at a 108bp mid-market spread, 2bp inside the 110bp reoffer level.

With stocks moving up and investors fleeing long-dated high-grade, the obvious trade was to add high-yield exposure, and fast money guys were seen doing just that. There was renewed demand for some of the most beaten-up bonds in the Chinese property sector, such as Soho China, which saw its 2017s gain USD1 in the week to close at 99.75 on Friday.

The gains came in spite of announcements last week that the Chinese government was taking steps to curb property appreciation. While the talk pushed property stocks lower by as much as 10% on Monday, they had little effect on the bonds of the same companies. Some lost ground on Monday, but by Friday the whole sector had recovered the losses and was some 25ct higher in price terms.

Again, China Vanke's new bond exemplified the resilient bid for debt from the sector. The company priced a five-year USD800m bond at 195bp on Thursday that closed on Friday quoted at 183bp.

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