October 1, 2014 / 8:38 AM / 3 years ago

ASIA CREDIT CLOSE: Liquidity dries up as China heads out

SINGAPORE, Oct 1 (IFR) - Asian markets were generally flat on low liquidity. Traders said the market was dead, with Hong Kong out for a public holiday for the next two days and China off for Golden Week.

"A lot of clients don't want to trade on a day with such low liquidity," said one trader. Investment-grade CDS was around 1bp-2bp tighter on minimal volumes, but high-yield was unchanged, which at least put a halt to the recent sell-off in that sector.

Another trader saw selling of Chinese corporate bonds and demand for Indian corporate paper from real money clients, but in small sizes.

Market participants will have to wait until Friday to see whether S&P's downgrade last night of half of the Basel III bank capital in Asia on new methodology has any impact on yields.

With a dearth of liquidity, there was no price action in the affected bank capital, and many thought the rating action an irrelevance anyway.

"They change their methodology every 12 months," said one DCM banker. "It's not really much of an issue unless it drops someone out of investment grade."

The rating agency now deducts an additional notch for Basel III Tier 1 capital instruments for Asia-Pacific banks because it believes that there is greater potential for issuers to miss coupon payments when they need to maintain regulatory capital conservation buffers under Basel III.

Daniel.stanton@thomsonreuters.com

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