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Fed gives credit market new lease of life just as rally falters

Dollar bonds in Asia follow turnaround in US; HSBC predicts 6-7% returns for Asian investment-grade notes

New York 

CREDIT markets rallied around the world after a Federal Reserve plan to purchase individual US corporate notes gave a boost to flagging investor sentiment.

Dollar bonds in Asia followed a turnaround in US markets as the Fed's move underscored major central banks' commitment to supporting companies through the coronavirus crisis. Up until the announcement late Monday, the cost to protect corporate debt against default had been rising in New York in sync with a broader risk-off tone, as signs of a second wave of the infections fuelled concern markets had gotten ahead of fundamentals.

The Fed said it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending programme that to date has purchased only exchange-traded funds. The central bank also spelled out for the first time how it plans to implement its buying strategy, saying it would follow a diversified market index of US corporate bonds created expressly for the facility.

At least seven borrowers including China National Petroleum Corp and Indonesia are looking to price notes as the pace of issuance in Asia's primary market catches up after lagging behind other regions. It's still possible to pick up large additional spreads on Asian dollar bonds over US peers even after premiums in the region tightened in recent weeks, and the Fed move could further boost the relative value of the notes.

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"Asia again stands out for offering attractive value and attractive pick-up to US credit," said Paul Lukaszewski, head of corporate debt for Asia and Australia at Aberdeen Standard Investments. "This is notable with US spreads having mostly recovered and the Fed signalling low rates are here to stay for an extended time."

HSBC Private Banking predicts 5 per cent to 6 per cent returns for Asia high-yield bonds and 6 per cent to 7 per cent returns for investment-grade notes from the region this year, according to Jeffrey Yap, regional head of fixed income, currencies and commodities, Asia at the private bank. Mr Yap said in an interview this week he expects credit spreads to continue to tighten in Asia.

Asia spreads on Asia investment-grade dollar bonds fell about 5-15 basis points, according to traders, bringing a halt to a four day sell-off.

The cost of protecting Asia debt against default dropped about 7-8 basis points on Tuesday, according to traders. The gauge had risen for the first week in four last week.

The Bank of Japan left its main monetary policy settings untouched and revised the estimated size of its virus-response measures, while pledging to do more to help the pandemic-hit economy if needed.

The cost to protect investment-grade corporate debt against default dropped after the Fed announcement on Monday and high-yield credit risk also fell, according to Markit CDX indexes.

Risk-off sentiment had kept US investment-grade borrowers on the sidelines, though several companies including Westinghouse Air Brake Technologies Corp held investor calls ahead of potential debt offerings.

The European Union's primary market recorded its 15th zero sales day this year, data compiled by Bloomberg show. The slump stands in sharp contrast to last week's busier-than-expected 77 billion-euro (S$121 billion) haul.

Dutch retailer Hema BV agreed to hand creditors control of the company in return for halving its debt, it said in a statement on Monday.

Scandinavia's main carrier SAS AB has won state backing to target 12.5 billion kronor (S$2.6 billion) in new funds, with the arrangement set to redraw ownership lines and leave some creditors sharing potential losses. BLOOMBERG

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