HONG KONG, July 25 (IFR) - Asian credit markets remained defensive after a brief recovery on the back of hopes the euro zone’s new bailout fund will get more teeth to tackle the region’s deepening debt crisis.
The overall tone was subdued but volumes were muted as investors are likely to stay invested in emerging market assets at a time when interest rates will remain low for longer.
The benchmark iTraxx investment grade index series 17 was trading at 173/175bp, off from a wider 174/176bp earlier in the day. This compares with yesterday’s 172/174bp and is significantly wider than last week’s close of 161/162bp.
In the sovereign bond space, Philippines bonds outperformed their Indonesian counterparts with the 2037s trading at 115 on the back of local buying. These bonds have been under pressure from profit-taking after the recent sharp rally.
But global investors are joining local investors to lend support to these bonds as fund flows into the region continue to be robust.
“EM yields can go lower, as valuations are still fair. Many of these countries have close to zero credit risk and the yields are attractive given the low Treasury yields and negative yields in Europe,” said Kevin Daly, London-based fund manager with Aberdeen Asset Management.
At current yields, Philippine 10-year bonds are yielding just 260bp above the US Treasuries, but the risk premium could be further narrowed.
“It certainly feels like EM risk premium will go down further as low UST yields persist. We would be more comfortable parking money in EM debt than in high yield - factors like attractive growth and low debt levels suggest credit risk will stay very low,” said Daly.
In the investment grade sector, Hutchison Whampoa bonds were unmoved by news that the group is acquiring UK gas company Wales and West Utilities for GBP645m (USD1bn).
The Hutch 2022s are trading unchanged at 235/232bp while the 2017s are 2-3bp tighter at 170/165bp on technicals.
“The group is issuing shares to fund the deal, and in any case this is not a big amount for the group,” said a Hong Kong-based trader.
Indian banking sector bonds remained muted as State Bank of India launched a 5-year bond deal at what seemed to some a generous spread level. Supply expectations and macro concerns have reined in these bonds in the recent rally.
“The Indian banking sector has the most value in the investment grade space,” said a Hong Kong based trader.“It has lagged the rest of Asia and, even when compared with bonds like Reliance which have rallied 50-60bp, their bonds have gained only 20-30bp.”
The high-yield space was dominated by a weak secondary market performance by newly sold bonds from China Fishery Group. The bonds, sold at par traded as low as 99.15/99.20 before recovering slightly.
Traders said the weak opening was in line with the market but the reception also indicated that the high yield primary market needed stronger names before it could start flowing.
“The issue is you need better quality names. That’s why you are seeing so much push back for these transactions,” said a Singapore based trader referring to the recent high yield issues. “For better quality names, you could have repeat issuers and those that are trading above par.”
Indonesian coal sector also eased after Peabody Energy reported lower second-quarter earnings.
The impact was greater on the high beta names with Bumi and Berau down by 0.75-1.25 points on an average. Bumi 2017s are trading at 100.75/101.50,m for a yield of around 10.5%. These bonds have rallied from a low of 95 struck in early June.
The low beta names like Adaro and Indika suffered less in comparison with losses being in the range of around half a point. Adaro 2017s are trading at 105.5/106. They were trading at around 103 last month.