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Asian high yield credit benchmark spreads tightened on Wednesday after a strong rally in Wall Street overnight improved risk appetite, but increases were capped as investors booked profits after recent gains.
Spreads on Hong Kong's dominant fixed line operator, PCCW, remained unchanged, while its shares rose 37 percent after a buyout offer by China Netcom and PCRD to minority shareholders for HK$15.94 billion ($2.1 billion).
The benchmark iTRAXX high yield index a key measure of risk aversion, moved in by about 50 basis points (bps) to 920 bps but the iTRAXX investment-grade index was marginally wider at 310/350 bps. The high grade benchmark has posted a strong rally from a record 650 bps a week ago and traders said investors were booking profits.
Overnight, US stocks rose to their highest close since October 6 in the biggest election rally ever as investors greeted the end to uncertainty surrounding the long fight for White House. Meanwhile, the broad market received a boost from a win for Democrat Barack Obama who captured the White House defeating Republican John McCain to become its first black US president.
"Though Obama has enormous challenges, a $1 trillion plus deficit to deal with, ultimately part of the jigsaw is stabilising and bolstering US consumer sentiment," said Glenn Maguire, Asia Pacific chief economist at Societe Generale. "And if that happens its a positive for Asia."
Spreads on sovereigns like Indonesia, countries whose economies have a large dependence on foreign investments, narrowed in the hope that risk aversion towards emerging markets would subside. Its 5-year credit default swaps (CDS) - insurance-like contracts that protect against defaults and restructuring - moved in to 440 bps from Tuesday's 550 bps.
But traders said there was little trading in cash bonds as investors remained hesitant to trade given the wide spread between bid and ask. "We are trading in a new credit environment here, people cross bids at 50 bps. There is no quarter point bid any more," said a Singapore-based trader.
PCCW's bond due in 2015 were quoted unchanged at 950 basis points over Treasuries even as shareholders China Netcom and PCRD are willing to pay a hefty premium to take the company private during a market slump. "This is not a good event for credit as it involves taking cash out of the business to fund the buyout. This does not get reinvested in terms of assets," said Brayan Lai, credit analyst with Calyon Corporate & Investment Bank.
Debt from the Philippines, one of Asia's most active issuers, was trading steady to marginally weaker despite inflation slowing for the second month in a row. "Offshore accounts are taking in profits after the recent sharp rally," said a Manila-based trader. The 2032 bonds were trading at 90/92 cents to a dollar, down by about a point while its 5-year CDS was steady at 325 bps.

Copyright Reuters, 2008

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