SINGAPORE, May 30 (IFR) - Asian CDS widened today as dealers began to reflect the recent sell-off in investment-grade bonds on their hedge positions. The Asia iTraxx IG index was closing the session some 2bp wider at 112bp mid-market.
Sovereign protection was also under pressure with the 5-year CDS for South Korea ending the session at 74bp, some 2bp wider on the day, and Indonesia's CDS touching 167bp versus a 154bp print yesterday.
Curiously, though, single-name bonds were holding up fairly well today. Cash prices for Indonesia's most liquid bonds were some 25ct higher on average in the day.
It was the same for the bonds of Pertamina and other quasi-sovereigns from Indonesia. Bonds from Vedanta, which outperformed yesterday, closed the session unchanged, holding on to gains.
However, overall, traders and analysts said very few bonds actually changed hands. "Everybody is taking a step back now, due to the Treasury volatility, to see where this is going," said one credit strategist in Singapore.
Another analyst noted that the end of the first half was also prompting some repositioning as private banking and institutional accounts reviewed their portfolios and shed the underperforming bonds.
Still, amid the thin liquidity, the 44bp rise in the yield of the 10-year Treasury in May has shifted spreads of Asian benchmark bonds. With CDS failing to follow, it has created basis trades opportunities.
The 5-year CDS for Indonesia, for instance, is almost 20bp inside the 185bp spread of the sovereign's new 2023s. Given that the two levels tend to converge, dealers have started to bet on a correction in CDS.
Even fast money, however, is being cautious about taking any positions due to the volatility in Treasury rates. Much of the performance of credit in the next few days will depend on the preliminary US GDP numbers, which are due to be released today during New York hours.
If it is below the median estimate growth of 2.5%, a rally in US Treasuries might ensue as investors bet that the Federal Reserve will not halt its monetary stimulus anytime soon. The opposite, however, could also true.