ASIA CREDIT CLOSE: Spreads wider on euro zone jitters; volumes thin
HONG KONG, July 23 (IFR) - Asian credit spreads blew out on Monday as prices were marked wider on eurozone-related jitters amid thin volumes. But the technical outlook stayed favourable as funds are expected to remain invested in emerging market credits.
The benchmark iTraxx Asia investment grade index was marked as wide as 171/172bp in late trade after Spanish 10-year government bond yields hit their highest level o n Monday since the euro was launched. The index had hovered around its best in three months last Friday at around 161/162bp.
The investment grade segment was marked 5-10bp wider, but for all the gapping out in numbers, there was no kneejerk investor response.
"There is no panic selling and technicals are still solid for a lot of these bonds although buyers have been on the backfoot today," said a Singapore-based trader, noting that the strong inflows into emerging market fixed income assets was still there.
"I see a pullback on the back of this strong rally we had recently, but the European weakness means some people will move out of there and into emerging markets."
Fund tracker EPFR Global data showed EM fixed income fund saw inflows of USD935m in the week to July 18, bringing the four-week aggregate to USD3.6bn.
High-yield inflows have been even more impressive with additions of USD1.3bn in the latest week, taking the four-week tally to USD7.5bn.
Much of the recent trading volume was in the sovereign debt space where Indonesian and Philippine government bonds have reported stellar gains in recent weeks on the back of the US Treasury rally.
The Indonesian 2022s and the Philippines 2022s are down by half to three-quarter of a point at 103.5/104 and 110.25/110.75, respectively.
But in a sign that investors continue to seek pick-up over near record low US Treasuries, the losses at the longer end are contained.
The Philippines bonds due 2034 are bid at 134.5, the 2037s are at 115.25 and the Indonesian 2042s are at 106.75, all lower by an eighth to a quarter of a point.
Among recent new issues, CIMB 2017s are at 203/193, quoting much wider than last week's reoffer spreads.
New bonds from Korea are also weaker with the Kogas 2017s at 183/178bp, above the 175bp issue price earlier this month. Korea Exchange Bank are also wider at 203/202bp.
Sri Lanka's sovereign bonds remained steady amid a sell-off on hopes of funds coming from the International Monetary Fund. The agency has approved the final loan tranche of USD415m for the country, sparking hopes the global lender will push through another programme by the month-end.
The recently sold bonds due 2022 are trading steady at 101.50, way higher than last Tuesday's reoffer at par and close to the peak struck after it was riced at a yield of 5.875%.
In contrast, analysts are getting wary of rich valuations in state-owned Development Bank of Mongolia.
The bank's bonds due 2017 are trading half a point lower at 99/99.125 for a yield of just under 6%, a rise of 50bp in the past two weeks. The 5.75% bonds were sold in March at par as a heavy USD6.25bn order book helped the bank raise USD580m.
The bonds carry an unconditional and irrevocable guarantee from the Ministry of Finance on behalf of the government of Mongolia and are seen as a proxy for the commodity dependant economy. Softer commodity prices, weaker demand from giant neighbour China and fears of resource nationalism are some of the risks pressurising these bonds.
High yield bonds are trading 1-1.5 points lower with the underperformers of the day in Evergrande 2015s 97.5/98 and the Bumi 2017s at 102.25/103, which are both trading off by 2 points. Evergande has rallied from 90 in mid-June while Bumi has risen from around 95.
"China property related bonds have rallied on expectation that the government would not tighten policies any further. Furthermore, given the lack of new issuances and continuing strong inflows, high yield investors are pushed to invest in the same names, pushing the market higher, despite already rich valuations," said a Singapore based analyst but warned of selling ahead.
"However, with yield shrinking significantly, the market could be nearing the end of this rally, especially if the primary market starts to pick up."
CreditSights said in a report issues could be seen from credits rated below BBB-.
"There is probably still a steady pipeline of high yield companies waiting in the wings for market conditions to stabilise. Country Garden (Ba3/BB-) is one of the few major Chinese property companies not to have tapped the bond market this year and could seek to raise funds opportunistically, as a liquidity buffer or for potential land acquisitions.
Road King (Ba3/BB-) and Kaisa (B2/B+) have also mentioned that they would like to issue bonds if market conditions permit," it said. Indonesians Medco Energi and Energi Mega Persada are also seen as likely candidates.
(umesh.desai@thomsonreuters.com)
The benchmark iTraxx Asia investment grade index was marked as wide as 171/172bp in late trade after Spanish 10-year government bond yields hit their highest level o n Monday since the euro was launched. The index had hovered around its best in three months last Friday at around 161/162bp.
The investment grade segment was marked 5-10bp wider, but for all the gapping out in numbers, there was no kneejerk investor response.
"There is no panic selling and technicals are still solid for a lot of these bonds although buyers have been on the backfoot today," said a Singapore-based trader, noting that the strong inflows into emerging market fixed income assets was still there.
"I see a pullback on the back of this strong rally we had recently, but the European weakness means some people will move out of there and into emerging markets."
Fund tracker EPFR Global data showed EM fixed income fund saw inflows of USD935m in the week to July 18, bringing the four-week aggregate to USD3.6bn.
High-yield inflows have been even more impressive with additions of USD1.3bn in the latest week, taking the four-week tally to USD7.5bn.
Much of the recent trading volume was in the sovereign debt space where Indonesian and Philippine government bonds have reported stellar gains in recent weeks on the back of the US Treasury rally.
The Indonesian 2022s and the Philippines 2022s are down by half to three-quarter of a point at 103.5/104 and 110.25/110.75, respectively.
But in a sign that investors continue to seek pick-up over near record low US Treasuries, the losses at the longer end are contained.
The Philippines bonds due 2034 are bid at 134.5, the 2037s are at 115.25 and the Indonesian 2042s are at 106.75, all lower by an eighth to a quarter of a point.
Among recent new issues, CIMB 2017s are at 203/193, quoting much wider than last week's reoffer spreads.
New bonds from Korea are also weaker with the Kogas 2017s at 183/178bp, above the 175bp issue price earlier this month. Korea Exchange Bank are also wider at 203/202bp.
Sri Lanka's sovereign bonds remained steady amid a sell-off on hopes of funds coming from the International Monetary Fund. The agency has approved the final loan tranche of USD415m for the country, sparking hopes the global lender will push through another programme by the month-end.
The recently sold bonds due 2022 are trading steady at 101.50, way higher than last Tuesday's reoffer at par and close to the peak struck after it was riced at a yield of 5.875%.
In contrast, analysts are getting wary of rich valuations in state-owned Development Bank of Mongolia.
The bank's bonds due 2017 are trading half a point lower at 99/99.125 for a yield of just under 6%, a rise of 50bp in the past two weeks. The 5.75% bonds were sold in March at par as a heavy USD6.25bn order book helped the bank raise USD580m.
The bonds carry an unconditional and irrevocable guarantee from the Ministry of Finance on behalf of the government of Mongolia and are seen as a proxy for the commodity dependant economy. Softer commodity prices, weaker demand from giant neighbour China and fears of resource nationalism are some of the risks pressurising these bonds.
High yield bonds are trading 1-1.5 points lower with the underperformers of the day in Evergrande 2015s 97.5/98 and the Bumi 2017s at 102.25/103, which are both trading off by 2 points. Evergande has rallied from 90 in mid-June while Bumi has risen from around 95.
"China property related bonds have rallied on expectation that the government would not tighten policies any further. Furthermore, given the lack of new issuances and continuing strong inflows, high yield investors are pushed to invest in the same names, pushing the market higher, despite already rich valuations," said a Singapore based analyst but warned of selling ahead.
"However, with yield shrinking significantly, the market could be nearing the end of this rally, especially if the primary market starts to pick up."
CreditSights said in a report issues could be seen from credits rated below BBB-.
"There is probably still a steady pipeline of high yield companies waiting in the wings for market conditions to stabilise. Country Garden (Ba3/BB-) is one of the few major Chinese property companies not to have tapped the bond market this year and could seek to raise funds opportunistically, as a liquidity buffer or for potential land acquisitions.
Road King (Ba3/BB-) and Kaisa (B2/B+) have also mentioned that they would like to issue bonds if market conditions permit," it said. Indonesians Medco Energi and Energi Mega Persada are also seen as likely candidates.
(umesh.desai@thomsonreuters.com)
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