Asian bond spreads narrow to near one-month lows

07 Sep, 2010

Asian bonds extended gains on Monday, pushing spreads to their narrowest in nearly a month as investors were encouraged to buy the region's riskier but higher yielding credits after upbeat US job data. The Asia ex-Japan iTraxx investment-grade index narrowed 6 basis points (bps) to 119, traders said, the lowest since August 11.
-- Korea Hydro, Powerlong, others seen selling bonds
-- Philippine dollar bonds seen expensive
Asian shares rose after US data showed on Friday 54,000 government jobs were shed in August, less than the 100,000 the market had braced for. Some investors had expected even heftier losses. Bankers and traders expect more Asian corporate issuers to tap the global market, with Korea Hydro & Nuclear Power and China's Powerlong Real Estate Holdings Ltd seen selling bonds as early as this week.
The market is also abuzz with talk of a potential issue from Korea Finance Corp and from Indonesian and Philippine corporates, taking advantage of near zero rates in the United States and high demand from yield-hungry investors.
The string of expected new issues could pressure Asian credit spreads going forward, traders said, as some investors may switch from their existing portfolios to buy the new issues. But overall, sentiment on Asian bonds was upbeat on rosy outlook for the region's economies, seen outperforming the US and Europe, and continued fund inflows, traders said. Global fund tracker EPFR reported that emerging market bond funds received $707 million in fresh funds during the week ending on September 1.
Korea Development Bank's bond due in 2016 was traded at 174 bps above US Treasuries, extending its gains since it was issued last Wednesday. The bond debuted in Asia at 179 bps over US Treasuries on Thursday versus its issue price of 185 bps. The spread narrowed further to 177 bps on Friday. Sovereign bonds from the Philippines and Indonesia were also higher by a quarter to half a point, traders said. Philippine debt due in 2020 was traded at 120.5 cents on the dollar, up 3/4 of a point, and the Indonesian bond due in 2020 was up half a point to 114.75.
Some investors cautioned about Philippine dollar credits, noting that they had risen so much this year and could be ripe for profit-taking. The yield on the country's 10-year debt had fallen to 3.9 percent from a high of 5.9 percent in February. "Philippine dollar bonds are a bit expensive now. If you go into local currency bonds they will give you better value, there is potential further upside on the local currency and obviously the absolute yields are higher," Pedersen said.
The Philippine 10-year peso bond is yielding 6.25 percent, versus the 10-year dollar bond of 3.9 percent. The iTraxx SovX Asia Pacific index, which tracks the five-year sovereign credit default swaps of 10 countries in the region, narrowed 4 bps, traders said.

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