Asian bond spreads were steady on Monday amid optimism that investors' appetite for risk will stay robust in 2010, but a slew of sovereign bond issues expected in the opening weeks of the year is expected to limit gains. Expectations of a wider fiscal deficit and a new debt issue pulled down Philippine dollar bonds.
Upbeat employment figures in South Korea, optimism about upcoming US jobs data and the broad expectations of a sustained global recovery from the worst recession in the 1930s has boosted hopes money will continue to flow into riskier assets such as emerging debt. The Asia ex-Japan iTraxx investment-grade index was quoted at 94/97 basis points (bps), still hovering around 19-month lows. It was last below this level in mid-May 2008.
The Thomson Reuters Index of Asia emerging credit was quoted at 188.73 bps. Meanwhile, Vietnam and Indonesia appointed bankers to handle global bond transactions, a source said. Vietnam could raise up to $1 billion via the sale of bonds with a maturity of 10 years or more. Indonesia is also planning to raise $3-4 billion with an overseas tapping which could take place as soon as the next few weeks.
"Everyone is now waiting for Philippines to come to the market," said a Hong Kong based trader, referring to the traditional early offering by Asia's most frequent sovereign borrower. Last week, the Philippine central bank approved a sale of up to $1.5 billion in dollar bonds and $1 billion in Samurai bonds.
Investors have also turned cautious on Philippine bonds after Finance Secretary Margarito Teves said last week the government was looking at a full year budget shortfall of 293 billion pesos in 2010, higher than the market consensus of 278 billion. Bonds on the longer end of the yield curve took the biggest hit, falling about half a point.
The 2032 bond was trading at 97.75/98.25 cents on the dollar while the 5-year credit default swaps was quoted at 170/175 bps after opening at 160-178 bps. Emerging market credits had a strong run in 2009 as an improvement in the global economic outlook and easing of a credit crunch in financial markets encouraged investors to buy riskier, higher-yielding assets.
While 2009's performance was unlikely to be repeated this year in emerging markets, it is expected assets there would remain in favour. HSBC's Asian Dollar Bond Index showed that the average spread of Asian credits tightened to around 267 bps from 700 bps at end-2008, generating a total return of about 25.4 percent in 2009.
"Suppressed risk free rates, high earnings multiples in the equity market and a favourable fundamental backdrop in Asia Pacific suggest investors are unlikely to fall out of love with credit any time soon," said a client note from Royal Bank of Scotland.
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