Asian credit no longer safe haven during turmoil

BY DANIEL STANTON
SINGAPORE, Aug 25 (IFR) - Asian credit lost its status as a global safe haven this week, as the market slumped in response to a steep drop in Chinese equities and weakening Asian currencies. An 8.5% drop in the Shanghai share index on Monday was accompanied by Chinese asset managers selling dollar bonds in the secondary market. Blue chip paper widened, with 2020 bonds from CNOOC, Sinopec and Cinda Asset Management gapping 12-14bp against Treasuries. However, most of the activity in the credit market was in the regional credit default swap index, as tends to be the case in periods of high volatility because it is more liquid than individual bonds. The Asia iTraxx investment grade widened 15bp on Monday and a further 11bp by mid-afternoon the following day. "This is one of the darkest days I can remember for Asian credit," said one credit trader on Monday. This was in contrast to previous downturns, when Asian credits remained resilient even as other emerging market bond yields rocketed. "As bad as the recent sell-off in Asia may have felt, Asia credit has merely widened in line with global credit over the last three months after outperforming for more than a year," wrote Nomura on Monday. It pointed out that Asian credit had widened 32bp since June 1, during which time US, EMEA and Latin American credit had widened 28bp, 43bp and 96bp, respectively. This followed a period of out-performance by Asian credits. "From the start of 2014 to June 1 2015, Asia credit had tightened 61bp," wrote Nomura. "During that period, US credit had widened by 19bp, EMEA credit had widened by 23bp and LatAm credit had widened by 31bp - in other words, Asia credit had outperformed the rest of the world by 80-90bp over the last one and half years and has merely widened in line with the rest of the world over the last three months." CAPITAL OUTFLOWS

During the last sell-off in Asian credit, in early July this year, Chinese private bank clients were seen selling to meet margin calls on equity losses, but activity then focused on high-yield paper, which makes up a small part of the region's bond market. Selling by large Chinese asset managers this week raised fears that some had been forced to reduce their positions in G3 bonds, due partly to the devaluation of the renminbi against the dollar. That led to concerns that the resulting plunge in prices would prompt emerging markets investors to cash out after a relatively successful year so far in Asia, leaving the market short of support. "We are very mindful of outflows from emerging markets funds," said the trader. "Locals need to step up, and they are unlikely to buy dollar credits." Asian credit has been resilient this year, partly because US investors, who are traditionally the first to sell in times of trouble, have bought a smaller proportion of bonds from the region, after troubles at property developer Kaisa in January made them wary of Chinese risk. "Capital outflows are unlikely to disrupt Asian credit funding, in our view, because most Asia USD bonds are placed and held in Asia," Morgan Stanley wrote. It noted that fund flows into Asian credit were flat in July, but had been strong between April and June. However, Morgan Stanley added that offshore bond issuance from Asia could fall by 40% from last year, as issuers looked to raise cheaper funds onshore and limit FX risk. High-yield bonds were less affected, probably because they had sold off dramatically the week before, when Indonesian HY names dropped 10 points, but independent credit research provider Lucror Analytics noted a further 2-point drop in Indonesian high-yield and 2-4 points in Chinese industrials on Monday. "The market is now very sensitive to any bad news, be it systemic in nature or firm-specific," wrote Charles Macgregor, head of Asia at Lucror. (Reporting by Daniel Stanton; Editing by Vincent Baby)