Sovereign debt outperforms; investors seek quality

(IFR) - Flows remained light in the morning Asian credit trading session, spreads tightened marginally and the scarce Asian sovereign space benefited from a flight-to-quality mindset, which has pushed the offshore cash curves up to two points higher.

A Singapore trader noted that with the 5-year Treasury in an almost unprecedented period of low volatility, in the 0.95-0.90 range, there is a dilemma among fast money as to how to go about generating alpha.

“They want to sell at these ultra-low yields, but can’t see the realistic possibility of buying back paper at cheaper levels later on and are inclined to sit on their hands,” he said.

With volatility in the medium-term swaptions market having collapsed since Fed Chairman Bernanke’s pledge to keep short-term rates at zero for the next two years, fast money and the Street is a better seller of volatility.

The 3s/2s swaption vol has collapsed from 12% prior to Bernanke’s announcement down to 3%, which is a tempting point at which to sell vol on a medium term view, by shorting the two-year swap rate with a strike in three years’ time.

The iTraxx IG index is 140bp/142bp, and the sovX 5 at 136bp/140bp, both in by 1bp.

Liquid Asian CDS is between 1bp-4bp tighter. Leading the way are the Philippines at 152bp/155bp, Indonesia at 154bp/158bp and Hutch at 116bp/122bp, all 4bp tighter. The following are in by 3bp: Korea at 122bp/125bp, Thailand at 129bp/133bp and Malaysia at 107bp/111bp. China is 2bp tighter at 100bp/103bp.

The Philippines 2034s have led the sovereign offshore cash curve higher, gaining 2 points at 118 bid. The 2026s are up a quarter at 109-3/8.  Meanwhile the Indonesia and Sri Lanka 2021s are each a point higher at 107 and 102 respectively.  Elsewhere in high-grade, the NACF and KHFC 2021s are each 2bp tighter at Treasuries plus 266bp and 220bp respectively, while the Kexim 2016s, recently observed as cheap by a bulge-bracket Asian house are 5bp tighter at plus 245bp. High-yield in the China property and industrials space is broadly flat.