ASIA CREDIT CLOSE: Spreads tighten marginally in slow day

SINGAPORE, Oct. 2 (IFR) - Spreads and CDS in Asia tightened marginally today after getting a boost from a better than expected ISM number in the US overnight that buoyed stock markets. The iTraxx Asia ex-Japan IG index 18 was closing about 1bp tighter at 134bp-136bp.

The levels moved apparently as a result of a couple of trades on Korean, Philippines and Indonesia CDS. The five-year protection for all three sovereigns was ending roughly 1bp tighter in the day.

However, overall it was a very uneventful day with a holiday in Hong Kong and China draining the liquidity from the market. In a sign of how little activity there was, CDS for even some of the more liquid names was being quoted with a bid-ask spread of 3bp-5bp, when it usually trades with a 1bp-2bp spread.

Cash spreads slightly outperformed and both Indonesia and Philippines saw the premium of their 10-year bonds over the respective US Treasury bond tighten by about 2bp. Indonesia's basis is neutral right now, so the move had little effect on it. However, the basis on the Philippines is slightly negative so the outperformance brought it closer to neutrality.

Traders in Singapore did not report any moves in corporate bonds either, noting that most of the activity in the past months has been dictated by new issues.

With a potential window for issuance tomorrow, once Hong Kong is back, some desks were starting to position themselves, though they remained skeptical anything will pop out.

If tomorrow may be a slow day on the new issue front, some traders are saying that there could be a bit of a short-squeeze as Hong Kong accounts get back online to a market that was quite positive today, boosted by good headlines in Europe over the weekend related to Spain's bank stress tests, and in the US with ISM number showing economic expansion yesterday.

A rally in the credit market, though, may entice issuers to come out of the box and hence provide some supply to counterbalance the potential spike in demand.

Overall, however, as the new quarter starts in earnest tomorrow, bankers are expecting accounts to be more defensive in their asset allocation to bonds. This could mean more rotation when new issues hit the tape, instead of outright buying. "Technicals are starting to get more neutral, in spite of the strong inflows this year," said a banker in Singapore this morning.

Hence, he suggested, it would not be surprising if outstanding bonds of a certain sector and country sell off more aggressively when a new issue from that sector and jurisdiction is announced. "It makes sense to see some rotation as accounts will prefer to take profits on bonds they hold to invest in the new ones instead of committing new capital," said another banker.

This means that starting tomorrow, when Hong Kong returns, new issues might have an even bigger impact on the secondary market.