EM ASIA DEBT-Spread widen as new issues, earnings in focus

Published: 26 Oct 2009 22:07:53 PST

HONG KONG, Oct 27 - Asian credit spreads widened on Tuesday as a steady stream of prospective new offerings and weakness in regional equity markets checked investor appetite for risky assets.

The Asia ex-Japan iTraxx investment-grade index moved out by 2 basis points (bps) to 103/108.

"The market has rallied quite a bit. And with December likely to be quiet, we have only a month and a half of trading this year so it is natural for people to lock in profits," said a Hong Kong based fund manager.

Global risk appetite has grown steadily since early march this year as investors sensed an economic rebound which would boost consumer demand and corporate earnings.

The TRX Emerging Asia Index has shrunk to 125 bps from the early March levels of around 450 bps.

Recently sold bonds, issued at relatively tight spreads saw some profit-taking as some investors raised funds to subscribe to new offerings. For a table on new issue pipeline

State Bank of India, which made a $750 million offering last week, saw its 5-year bonds widen to 231/227 basis points, compared to the issue spread of 226.4 bps above.

Indonesian coal producer Adaro's bonds were trading above par in New York trading hours were down to 99.5 cents on the dollar. The 2019 bonds were sold at 99.141.

"What is clear from this point on is that the recovery we have seen through 2Q and 3Q is unlikely to apply across the entire corporate sector," said a note from Nomura International.

"Instead, focusing on sector specific supply and demand issues will be key," it said.

Asian corporate bonds are also seen tracking company earnings for the third quarter, which will be announced over the next couple of weeks, because of the growing correlation between stock and credit indices.

The correlation between the Asian investment grade index and the MSCI index of Asia Pacific stocks traded outside Japan has remained at above 0.90 since June this year. The correlation on a 90-day rolling basis, was around 0.5 in early March ahead of the global equities rally.

A measure of 1 indicates a perfect correlation between two benchmarks which means the rate of change of the two indexes are exactly the same.

In sovereign bonds, Philippines new bonds, sold earlier htis month, were trading half a point lower at 98.50 cents on the dollar. These bonds, due in 2034 were issued at 99.382 for a yield of 6.425 percent. They currently yield 6.5 percent.

The 5-year credit default swaps were 5 basis points wider at 168/178 basis points.

The country, Asia's most frequent sovereign issuer in the global bond market, made three trips this year raising $3.25 billion.

FIVE-YEAR CREDIT DEFAULT SWAPS

Bid/Ask spread

Current Week ago

Korea Dev Bank 99.96* 100.00*

Hutchison 79/83 76/80

PCCW-HKT 99.64* 103.75

China 74/78 65/69

Indonesia 176/186 159/166

Korea 90/95 84/88

Malaysia 89/94 79/83

Philippines 166/175 150/157

~no bid or ask

*midspread

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