Asian bond spreads tighten despite U.S. rate concern
Asian bond spreads tighten despite U.S. rate concern
HONG KONG (Dow Jones): Recent rallies in regional stock markets helped Asian bonds temporarily overcome U.S. interest rate concerns to see a further tightening of spreads.
Korea's 2008 bond, the most liquid benchmark in the region, has narrowed close to all-time lows. It's quoted at 215 basis points over Treasurys, compared to 233 basis points a week ago.
Korean quasi-sovereigns are taking their cue from the benchmark, with KDB 2006 tightening to 220 basis points from 230 basis points last week.
Traders said investors, however, remain worried about the direction of U.S. rates, and that Asian bonds are likely to see some degree of sell-off once there's a clear picture on U.S. interest rates and Treasury yields move in a decided direction. Overnight, the 30-year Treasury yield broke through the key 6% level.
Despite that development, traders said U.S. and Asian investors are still looking to buy Asian paper. And, given the market's lack of liquidity, spreads will continue to tighten.
"You don't see spreads widening even though (U.S.) rates are going higher," said a Hong Kong-based chief trader with a European bank. "Granted, the (U.S.) interest rate cycle seems to be turning around, but Asian spreads will hold tight as long as there's not much liquidity."
Buying is now limited to sovereigns - the only issues still liquid well into a lengthy month-long rally. Second-tier corporate paper, which had attracted high-yield investors some months back, is now difficult to trade, since past buyers are unwilling to sell.
Meanwhile, Indonesian paper - both sovereign and corporate - continued to outperform the rest of the Asian market. The smooth June 7 elections and the relatively trouble-free vote-counting process has reassured investors.
The spread on Indonesia 2006 came in about 80 basis points on Tuesday due in part to U.S. demand. Wednesday morning it was quoted at 666 basis points, compared to 744 basis points a week ago. However, trades are volatile with single transactions, moving spreads by as much as 50 basis points, traders said.
Some market sources said gains on Indonesian paper are likely limited, with some widening possible in the near future as the election-related euphoria wears off and investors focus again on the country's deeply rooted economic problems.
On a broader regional level, the Asian bond market will take its cue from U.S. markets, closely watching Friday's U.S. producer price inflation data and next Wednesday's consumer price index.