Asian debt spreads jumped to their highest in a month on Tuesday, tracking weak equities on worries about the global economy, but dealers said the outlook remained upbeat given continued strong investor demand for regional credits.
The Asia ex-Japan iTraxx investment-grade index widened 3 basis points (bps) from Monday's close to 127 bps, traders said, the highest since July 20. But levels were still far below this year's high of 172 bps hit in late May, when investors were rattled by fears of a sovereign debt crisis in Europe.
"It's nothing severe. It's just in sympathy with the broader markets including equities," a trader from Singapore said. "This is a tiny move. The outlook remains positive for Asian bonds."
Asian shares fell as recent weak economic data from the United States and Europe kept investors away from riskier assets. The index of Asia Pacific ex-Japan stocks was down 0.3 percent at 0358 GMT. The investment-grade Markit iTraxx Europe index was little changed at 111 bps.
After rising since its Asian debut on Friday, debt from Hong Kong's dominant fixed-line telephone operator PCCW slipped. The bond due in 2016 widened 3 bps to 275 bps above US Treasuries, traders said, but still lower than its issue price of 288 bps.
The bond tightened to as low as 270 bps over US Treasuries on Monday after PCCW said it would sell $167 million worth of new shares to help pay off debt. Philippine sovereign bonds also succumbed to profit taking, traders in Manila said. After scaling record highs in recent sessions, the 2020 debt slipped to 120.50 cents on the dollar from 121.25, one trader said.
Some traders said Philippine bonds were expensive at these levels and expected investors to continue to pocket gains. Overall, Asian credits are still seen doing well in the coming sessions as lower rates in developed markets drive investors to the region seeking higher yields. Asia's upbeat growth outlook also means that the risks of defaults are easing.
During the week ending August 18, emerging bond funds extended their year-to-date inflows to a record $32.8 billion year-to-date, global fund tracker EPFR said, surpassing a full-year record of $9.7 billion set in 2005. In contrast, EPFR noted outflows from equities, including from equity funds in Asia outside of Japan.
On the credit default swaps (CDS) front, the iTraxx SovX Asia Pacific index, which tracks the 5-year sovereign CDS of 10 countries in the region, widened 3 bps to 119. In the primary market, bankers said new issues may pick up in September as investors returned from summer breaks. One banker said he expected sales from companies in the Philippines, Indonesia, South Korea and India.