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ASIA CREDIT CLOSE: Spreads tighten on robust inflows,China stimulus hopes

HONG KONG, Oct 3 (IFR) - Asian bond spreads tightened further on Wednesday as signs of a slowdown in Australia and China were taken by investors as a prelude to more stimulus, stoking bids for riskier, higher yielding assets.

The Asia ex-Japan investment grade index iTraxx series 18 was about 3bp tighter at 131/133bp, even after data showed China's PMI fell to 53.7 in September, the lowest since November 2010. Investment grade bond spreads were 3-5bp tighter with buying generally across the board but volumes were thin with the ECB decision and non-farm payrolls data looming.

"The lingering concerns of China slowdown have been used by investors to load up on risk in anticipation of stimulative measures from the government," said Clifford Lau, Threadneedle's Head of Asia Pacific Fixed Income.

"Markets still believe policymakers are in control of the situation so I don't see a major pullback. We may end the year on slightly tighter spreads if investors continue loading up."

The China data followed gloomy Australian economic data where the nation's trade deficit blew out to its widest in 3.5 years in August.

Investors confidence about policymakers taking proactive measures was reinforced the day before when the RBA cut its benchmark interest rates.

Still, conditions are not gloomy enough to expect a marked deterioration in credit profiles. And technical factors are in play as well, with fund inflows into EM fixed income remaining robust.

EPFR Global data showed Asia ex-Japan bond funds received USD1.7bn in new subscriptions in the year to September 26, compared with outflows of USD4.8bn for Asia ex-Japan equities.

That has encouraged investors to push more cash into credits as central bank actions have ensured rates will remain low for longer.

"Clients are not buying in massive size but chipping away at street inventory and on the back of that the tone is firm," said one credit trading head in Hong Kong while adding that offers were outstripping bids three-to-one. "The key to further tightening would be a pause in supplies."

New bonds from Indian Railway Finance Corp are helping boost the bid for the rest of the sector as it indicated appetite for paper from Asia's third biggest economy.

EXIM bonds due 2017 are indicated at 270/250bp over US Treasuries and the existing 2016 bonds from IRFC are at 295/275bp. The new 5-year IRFC deal is at 310bp, which according to some analysts offers an adequate pick-up.

"We think this bond will be very well supported given the scarcity of 100% Indian government-owned quasi-sovereign USD paper available," said one analyst in a note who added Exim Bank's outperformance should help investors make a decision.

He said he was comfortable recommending investors buy this deal at T+290bp or tighter providing a 25bp pick-up to Exim Bank's USD500m 2017 bonds and some room for secondary outperformance.

Analysts say there would be a gap between the two given that Exim Bank is part of the EMBI index while IRFC does not qualify due to its USD300m size.

High yield bonds were up by a quarter to half a point with investors preferring the better quality names in general. That made the new issue underperformance more pronounced.

Agile 2017s are trading at 105/106 with Longfor trading at 109/109.75. But, in contrast, recently issued 5-year bonds of Fantasia are trading at 98/99 and the Sun Hung Kai & Co new bonds are at 98.5/99.5. These bonds were sold at a re-offer of 99.472 and 99.684.

Still most of the high yield sector continues to be driven by credit specific stories as investors have turned discerning. Bonds due 2017 from cash-strapped Bumi are trading up at 81.75/83.75 from last week's 78/79 on asset sale hopes.

Winsway 2016s tumbled to 70/72 from last week's 85/86 after Aluminum Corp of China (Chalco) scrapped a plan to buy a 29.9% stake in the company.

(umesh.desai@thomsonreuters.com)

Keywords: MARKETS ASIA DEBT/