April 5, 2012 / 9:04 AM / in 6 years

ASIA CREDIT CLOSE: All eyes on nonfarm payrolls in slow session

SINGAPORE, Apr 5 (IFR) - Trading was virtually inexistent today as Hong Kong and Singapore desks were only half-manned ahead of the long Easter weekend. The result was that most indices and prices ended the day mostly unchanged.

The Chinese property complex lost some 25ct across the board, but not much happened beyond that. With the all-important non-farm payroll number due later today in the US as well, nobody wanted to create any positions. Indeed, it seemed like the whole week was spent in this half-waiting mode.

But as squawkboxes remained silent, traders had time this week to mull what to do going forward. The conclusion is that they are down to a two-horse race. If the jobs report is weaker than expected, all the bets are on price gains in the belly of the sovereign curves in Asia, as the Fed is expected to then perform a negative butterfly and push down the yields of 5- and 10-year US Treasuries.

If the number comes in solid, then bets are on spreads tightening in Asia as US Treasury yields spike and sovereigns in the region are expected to outperform the global yardstick.

Barclays was betting Manila. On Thursday issued a report in which it suggested that Philippines 2021s were relatively cheap and indicated an overweight on Indonesia. Philippines 2021s closed Thursday at 104.25-104.50. Just a month ago they were over 106.00.

“Spreads are probably going to tighten,” predicted a trader in Hong Kong. His belief has a strong premise -- Asia has been outperforming other regions. According to a senior DCM banker, in the past couple of weeks, while most of the emerging markets saw better sellers in cash, Asia was seeing better buyers.

To be sure, the region did drift wider last week amid very thin trading as investors remembered that other countries in Europe may still pose a problem.

“After a strong start following the better-than-expected China NBS PMI data for March, Asian credit drifted wider over the course of the week due to a variety of cues including a weak Spanish bond auction,” summarized Krishna Hegde, head of Asia credit research at Barclays.

Yes, Asian credits did move in tandem with the rest of the world amid the mild risk-off stance that took over markets last week. But in relative terms, it still fared better.

For instance, Indonesia’s 2021s ended the week roughly where they started, at 108.00/108.50, with a spread some 3bp tighter. It did drop a bit on Tuesday but recovered on Thursday. Meanwhile, Brazil’s 2021s, for instance, ended the week 1bp wider in spread.

And with no indication that such momentum will slow down if yields on the 10-year US Treasury spike, Asian spreads are likely to tighten. This could prompt a rally in the Asia iTraxx ex-Japan IG 17.

The index did tighten in some 5bp on Tuesday when markets were on risk-on mode to as tight as 155bp, but closed the week some 2bp wider overall at 160bp. If spreads in the IG sector tighten, so will the index and the 153bp seems to be profit-taking point on the charts.

Christopher.Langner@thomsonreuters.com

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