Asian bond spreads narrow

Asian bond spreads tightened to their narrowest in 19 months tailing a tech-led rally in regional stocks, but rising US Treasury yields and a slew of new debt offerings in the new year are causing some concern. The Asia ex-Japan iTraxx investment-grade index shrank to 91/93 basis points (bps) from Monday's late trading level of 93/94 bps.
It is the narrowest since mid-May 2008 and year to date it has tightened by 73 percent. The Thomson Reuters Index of Asia emerging credit was quoted at 178.73 bps, down from a peak of 197 bps during the Dubai financial crisis. "Equities are higher and the general sentiment is good but liquidity is thin," said a Hong Kong based trader. "Credit market have had a fantastic year, but investors are still looking to buy as global economy continues to improve."
The MSCI index of Asia Pacific stocks traded outside Japan rose 0.6 percent led by the technology sector after a Barclays upgrade of chipmaker Intel Corp helped push the Nasdaq to a 15-month high. Activity in Asian credit has wound down to a near halt as investors protected their profits from a stellar year, which has given equity-like returns for some bonds. For example, Indonesia's 2019 bonds sold at 99.276 cents on the dollar in March, are currently trading at 145 cents on the dollar. The yield has collapsed to 5.3 percent from 11.75 percent.
Indonesia's strong economic performance and a rating upgrade has stoked investor interest considerably in South East Asia's biggest economy. Its 2014 bonds, sold at par in April is trading at 116.75 cents on the dollar, the yield has fallen to 4.65 percent from 8.8 percent. But supply concerns and rising Treasury yields could put a halt to this spectacular rally.
Global bonds sold by Asian borrowers are usually benchmarked against US Treasuries to give a specific spread over US government debt. Higher Treasury yields tend to pressure credit markets if investors suffer mark-to-market losses as the spreads may not sufficiently compensate for the additional risk.
"The biggest risk to the continuance of the rally in credit markets would be from action by central banks to reduce liquidity in the system and/or a sell off in the Treasury markets," said Richard Cohen, head of credit trading Asia Pacific at Credit Suisse. On Tuesday, US Treasuries slipped in Asia, pushing the 10-year yield up to a four-month high and the two-year/10-year yield curve to the steepest level on record. Volumes in 2010 are unlikely to match those of 2009, when issuance hit a record high of $62.86 billion up from the previous year's $25.4 billion, according to Thomson Reuters data.