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.