Asian credit spreads widened on Friday after US manufacturing data suggested the economic recovery was not as strong as anticipated with a likely pick-up in issuance activity also keeping a lid on demand. The Asia ex-Japan iTraxx investment-grade index widened by 7 basis points to around 122/126.
Investors could be looking to lock in profits after spreads tightened for two straight quarters and some may look to raise cash to buy new bonds from borrowers around the region looking to capitalise on the record low interest rates.
"The market has rallied quite far. Some of the indicators are flashing warning signs - implied default rates are below actual default rates," said Vijay Chander, head of credit strategy at Standard Chartered Bank. In the past quarter, the index narrowed by 75 bps from the previous three months, less than the 163 bps tightening posted in April-June. Traders say bonds which were the most vulnerable to selling were those that were trading at a high price in dollar terms.
For instance, Indonesian sovereign bonds due in 2019 are currently trading at 140.50/141.50 cents on the dollar, up from the issue price of 99.276 at the time of the sale in March and is seen as a target for profit-takers. "As treasuries rally you will not want to risk 40 dollars on the bond. I'd rather buy Indo 2037s at 99.50 and if anything goes belly up I'd rather mark to a 100 rather than to 140," said a trader in Singapore referring to mark to market valuation of bonds.
Philippine bonds have also come under a lot of pressure of late amid reports Manila may be planning a global debt offering yet again. National Treasurer Roberto Tan said Philippines is studying a third dollar bond issue this year and more domestic debt to fund a supplemental budget of 10 billion pesos ($213 million).
The Philippines' 6.5 percent bond due in 2020 was down half a point to 106.50/107 cents on the dollar, a Manila-based trader said. The cost of insuring debt from Manila also rose amid fears of additional supplies. Its 5-year credit default swaps widened 5 bps to 183/188 bps following the late Thursday comments from the Philippine National Treasurer.
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