Introduction
FinanceAsia is pleased to announce the results of a liquidity survey carried out on behalf of the HSBC Asian Dollar Bond Index (ADBI) to determine the level of liquidity in the constituent bonds in the Index. The survey is designed to show which bonds have been the most actively traded issues in the fourth quarter of 2001. It is not an indication of where prices have moved, nor is intended to be a guide to where the prices of the bonds will move in the future. Rather it aims to reflect the trading patterns that have emerged over the course of the last three months.
Market overview
The Asian credit markets have had another strong quarter with secondary spreads tightening generally across the board from their post-September 11th lows. In the last three months the HSBC ADBI has given a return of nearly 3.5%, increasing the year on year return of the index to nearly 15.5% (see Figure 1). This is a stunning return given the horrors the market has seen in other asset classes.
Driving the 4th quarter performance have been two main trends. Firstly, sentiment of the risk perception of Asian credit has shifted into a very positive gear. Secondly, relative to US assets, Asian bonds still offered a good yield.
At
the beginning of October, sentiment was beginning to creep up after the lows
reached in September. New money was flowing into the market and there was a
brighter economic outlook in the US and the rest of the world. Towards the beginning
of December there began to be a bit of profit taking as some investors closed
their books. And by mid-December the trading volumes had died down as investors
waited until the New Year.
The strong rally in Asian spreads over the period came about as Asian investors kept pumping the vast amounts of liquidity in the system into the bond markets. Investors were keen to buy both high-yield and high-grade bonds. The rally was effective across the curve both at the short and long end. "We have seen the market perform extremely well during the past few months," says Stephen Cheng, head of credit research at UBS Warburg.
This increasing convergence between the performance of high-grade and high-yield bonds shows a growing confidence in Asian credit across the board as well as a willingness to take on more credit risk. These positive credit expectations were confirmed in late November when rating agencies Fitch and Standard & Poor's upgraded the sovereign rating of Korea. This was in stark contrast to the other side of the world, where Argentina got ever closer to its inevitable default. More global credit worries surfaced in November as energy trading giant Enron started to collapse.
Methodology |
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During early December, Finance Asia contacted 25 market participants (brokers, traders and fund managers) and asked them to rank the liquidity of the 84 constituent bonds of the ADBI. We asked them if the bonds were 'illiquid', 'traded' or 'liquid'. The overall votes were then counted with a score of 0 given to 'illiquid' votes, 0.5 given to 'traded' votes and 1 given to 'liquid' votes. We then added the various scores and divided them by the number of votes received. This gave each bond a score of between 0 and 1. For bonds with a score of between 0 and 0.3, the issue was declared 'illiquid'. For bonds with a score of 0.33 - 0.65 they were declared 'traded'. For bonds with scores of 0.66 to 1, the issue was declared 'liquid'. |
Argentina and Enron together should have been enough to start a mini explosion in emerging market bond spreads. But the Asian credit universe held on to its lower yields, showing strength and resilience in the face of these exogenous shocks.
One significant factor in the performance of the markets in the fourth quarter has been the new issue pipeline. While the number of new Asian bond deals has not been huge, the size of the demand that has been chasing these deals has been phenomenal. When Singapore Telecommunications (SingTel) launched its inaugural Yankee deal in November, there was nearly $18 billion in demand for the eventual $2.2 billion deal. This huge book was in many ways attributable to the pricing which at 185bp over Treasuries for the 10-year tranche, was a touch generous for a double A credit.
Pricing again was the issue for PCCW, which came to market with a $1 billion deal priced at 360bp over Treasuries. This bond is now trading at the 290bp level demonstrating the huge spread contraction that has been available in the market this quarter.
What is heartening about these two bond issues is that they have not disrupted the secondary market that much. In the summer when PCCW aborted its $2 billion deal, the market widened 30bp in anticipation of the new supply. This quarter, the market only moved out 10bp prior to the new issue.
Another new feature of the new issuance market, which is tied to the Asian yield pick up, is that the book for the new bonds - SingTel, PCCW, KDB, and Bank Mandiri - saw an increase in the number of big ticket investors from the US and Europe. Previously this year, new issues had largely been bought by Asian investors - the so-called Asian-bid.
Changes in Liquidities |
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Out of the 83 bonds that make up the index, 50, or 60%, were deemed to be liquid. 23 - or 28% - were deemed to be traded. Only 10 or 12% were classified as illiquid. Compared to the third quarter there has been a 50% increase in the number of illiquid bonds, a 2% increase in the number of liquid bonds and a 15% decline in the number of traded bonds. HSBC ADBI Constituent Bond Liquidity Changes
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Looked at over the whole period, the survey reveals that volatility has been the dominant trend. The main changes to the liquidity of the bonds that constitute the survey have been an increase in the liquidity of the shorter-dated bonds and a decrease in liquidity of China-related bonds.
?Typically in times of volatility, investors seek refuge in the shorter end of the curve to escape the inevitable yield curve steepening,? says Woods. This desire to move into shorter-dated paper has been compounded by the continuing rate cuts by the US Federal Reserve, making the shorter end much more active than the longer end, across all countries and all issuers.
Bonds related to mainland China are always considered something of a safe haven. They are relatively highly rated and generally in short supply. Therefore there have been few sellers of China bonds. Added to this, Chinese institutions tend to be buy and hold investors which has increased the general illiquidity in the trading of China related paper. ?Institutions with a Chinese background hold on to their bonds,? says Sean Chang, senior fund manager at Invesco Asia.
Changes to the Index |
|
Over the past three months, certain changes have been made to the HSBC ADBI. Three new bonds have been added while three have been taken out. The three bonds that have been removed from the Index were due to mature within one year and so are generally held to maturity. For this reason they go almost totally illiquid and would skew the liquidity survey. |
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The three new additions to the index are:
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The three bonds removed were:
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However, on a relative basis, Asia has performed extremely well. Latin American bond markets have suffered hugely in terms of price and liquidity as a result of Argentina and the terrorist attacks. Eastern European markets have similarly suffered. But Asia has easily outperformed both those comparable markets, with spreads returning to normal levels and liquidity remaining high. ?Asian bonds have held up much better than those in Latin America and Eastern Europe,? notes Chang.
To emphasize this point, a look at the performance of the HSBC ADB Index reveals how well the Asian dollar bond market has done this year. So far in 2001, the index has given a return of 11.08%. This compares with the JPMorgan Emerging Markets Bond Index performance of 0.49%. Meanwhile the S&P 500 has lost 20.37%. In markets such as these the performance of the Asian bond markets and the index that tracks them has been nothing short of remarkable.
For more details please contact:
Zhang Zhi Ming
Tel : (852) 2822 2240
Fax : (852) 2218 9832
E-mail : [email protected]
The HSBC Asian Dollar Bond Index (ADBI¬)List of constituent bonds for 3rd quarter 2001 |
|
Bond description |
Coupon |
Maturity |
Sector |
Moody?s |
S&P |
Liquid |
Traded |
Illiquid |
|
|
|
|
|
|
|
|
|
|
|
CHINA 6.5 02/17/2004 |
6.5 |
02/17/04 |
Govt |
A3 |
BBB |
|
|
|
|
CHINA 7.30 12/15/2008 |
7.3 |
12/15/08 |
Govt |
A3 |
BBB |
|
|
|
|
SDBC 7.375 02/01/2007 |
7.375 |
02/01/07 |
Corp |
Baa1 |
BBB |
|
|
|
|
CHINA 6.625 01/15/2003 |
6.625 |
01/15/03 |
Govt |
A3 |
BBB |
|
|
|
|
CHINA 7.75 07/05/2006 |
7.75 |
07/05/06 |
Govt |
A3 |
BBB |
|
|
|
|
CHINA 6.125 11/04/2003 |
6.125 |
11/04/03 |
Govt |
A3 |
BBB |
|
|
|
|
CITIC Beijing 6.875 08/01/2003 |
6.875 |
08/01/03 |
Corp |
Baa2 |
BB |
|
|
|
|
SDBC 8.25 05/15/2009 |
8.25 |
05/15/09 |
Corp |
Baa1 |
BBB |
|
|
|
|
CHITEL 7.875 11/02/2004 |
7.875 |
11/02/04 |
Corp |
Baa2 |
BBB |
|
|
|
|
GH Water 7 06/22/2008 |
7 |
06/22/08 |
Corp |
Baa2 |
BBB |
|
|
|
|
CHINA 6.8 05/23/2011 |
6.8 |
05/23/11 |
Govt |
A3 |
BBB |
|
|
|
|
CITIC Pacific 7.625 06/01/11 |
7.625 |
06/01/11 |
Corp |
Baa2 |
BBB- |
|
|
|
|
CHINLP 7.5 04/15/2006 |
7.5 |
04/15/06 |
Corp |
A3 |
A+ |
|
|
|
|
HUWHY 6.95 08/01/2007 |
6.95 |
08/01/07 |
Corp |
A3 |
A |
|
|
|
|
HUWHY 7.45 08/01/2017 |
7.45 |
08/01/17 |
Corp |
A3 |
A |
|
|
|
|
HUWHY 7.5 08/01/2027 |
7.5 |
08/01/27 |
Corp |
A3 |
A |
|
|
|
| JARDIN 6.375 11/08/2011 | 6.375 | 11/08/11 | Corp | Baa1 | BBB+ |
 |
||
|
DAOHEN 7.75 01/24/2007 |
7.75 |
01/24/07 |
Corp |
Baa1 |
BBB |
|
|
|
|
WHARF 7.625 03/13/2007 |
7.625 |
03/13/07 |
Corp |
Baa3 |
BBB |
|
|
|
|
SWIRE 8.5 09/29/2004 |
8.5 |
09/29/04 |
Corp |
A3 |
A- |
|
|
|
|
MTRC 7.5 02/04/2009 |
7.5 |
02/04/2009 |
Corp |
A3 |
A+ |
|
|
|
|
KCRC 7.25 07/27/2009 |
7.25 |
07/27/2009 |
Corp |
A3 |
A+ |
|
|
|
|
KCRC 8 03/15/2010 |
8 |
03/15/2010 |
Corp |
A3 |
A+ |
|
|
|
|
MTRC 7.5 11/08/2010 |
7.5 |
11/08/10 |
Corp |
A3 |
A+ |
|
|
|
|
MTRC 7.25 10/01/2005 |
7.25 |
10/01/05 |
Corp |
A3 |
A+ |
|
|
|
|
HUTCH 7 02/16/2011 |
7 |
02/16/11 |
Corp |
A3 |
A+ |
|
|
|
|
HKLAND 7 05/03/2011 |
7 |
05/03/11 |
Corp |
A3 |
A- |
|
|
|
|
PAP 11.75 10/01/2005 |
11.75 |
10/01/05 |
Corp |
Caa3 |
CCC-/*- |
|
|
|
|
PIDLIJ 10.75 10/01/2007 |
10.75 |
10/01/07 |
Corp |
Caa3 |
CCC-/*- |
|
|
|
|
PTPOLY 11.375 06/15/2006 |
11.375 |
06/15/06 |
Corp |
NR |
D |
|
|
|
|
PTPAB 10 08/01/2004 |
10 |
08/01/04 |
Corp |
Caa3 |
CCC-/*- |
|
|
|
|
INDON 7.75 08/01/2006 |
7.75 |
08/01/06 |
Govt |
B3 |
B- |
|
|
|
|
SOUKOR 8.875 04/15/2008 |
8.875 |
04/15/08 |
Govt |
Baa2 |
BBB |
|
|
|
|
KORELE 6.375 12/01/2003 |
6.375 |
12/01/03 |
Corp |
Baa3 |
BBB |
|
|
|
|
SOUKOR 8.75 04/15/2003 |
8.75 |
04/15/03 |
Govt |
Baa2 |
BBB |
|
|
|
|
KDB 7.25 05/15/2006 |
7.25 |
05/15/06 |
Corp |
Baa2 |
BBB |
|
|
|
|
SAMSNG 9.75 05/01/2003 |
9.75 |
05/01/03 |
Corp |
Baa3 |
BBB- |
|
|
|
|
KDB 7.375 09/17/2004 |
7.375 |
09/17/04 |
Corp |
Baa2 |
BBB |
|
|
|
|
EIBKOR 6.375 02/15/2006 |
6.375 |
02/15/06 |
Corp |
Baa2 |
BBB |
|
|
|
|
KDB 6.5 11/15/2002 |
6.5 |
11/15/02 |
Corp |
Baa2 |
BBB |
|
|
|
|
KDB 6.625 11/21/2003 |
6.625 |
11/21/03 |
Corp |
Baa2 |
BBB |
|
|
|
|
KORELE 7.75 04/01/2013 |
7.75 |
04/01/13 |
Corp |
Baa3 |
BBB |
|
|
|
|
POHANG 7.125 11/01/2006 |
7.125 |
11/01/06 |
Corp |
Baa2 |
BBB |
|
|
|
|
POHANG 7.375 05/15/2005 |
7.375 |
05/15/05 |
Corp |
Baa2 |
BBB |
|
|
|
|
KDB 7.125 04/22/2004 |
7.125 |
04/22/04 |
Corp |
Baa2 |
BBB |
|
|
|
| KDB 5.25 11/16/2006 | 5.25 | 11/16/06 | Corp | Baa2 | BBB+ |
|
||
|
KORELE 8.25 03/15/2005 |
8.25 |
03/15/05 |
Corp |
Baa3 |
BBB |
|
|
|
|
SK CORP 7.5 05/31/2006 |
7.5 |
05/31/06 |
Corp |
Baa3 |
BBB |
|
|
|
|
LGCOIL 7.75 07/25/2011 |
7.75 |
07/25/11 |
Corp |
Baa2 |
BBB |
|
|
|
|
PETROL 7.125 10/18/2006 |
7.125 |
10/18/06 |
Corp |
Baa2 |
BBB |
|
|
|
|
TENAGA 7.875 06/15/2004 |
7.875 |
06/15/04 |
Corp |
Baa3 |
BBB |
|
|
|
|
TENAGA 7.625 04/29/2007 |
7.625 |
04/29/07 |
Corp |
Baa3 |
BBB |
|
|
|
|
PETROL 6.875 07/01/2003 |
6.875 |
07/01/03 |
Corp |
Baa2 |
BBB |
|
|
|
|
PETROL 7.625 10/15/2026 |
7.625 |
10/15/26 |
Corp |
Baa2 |
BBB |
|
|
|
|
PETROL 7.125 08/15/2005 |
7.125 |
08/15/05 |
Corp |
Baa2 |
BBB |
|
|
|
|
TENAGA 7.5 11/01/2025 |
7.5 |
11/01/25 |
Corp |
Baa3 |
BBB |
|
|
|
|
TELMAL 7.875 08/01/2025 |
7.875 |
08/01/25 |
Corp |
Baa2 |
BBB |
|
|
|
|
MAYBNK 7.125 09/15/2005 |
7.125 |
09/15/05 |
Corp |
Baa2 |
BB+ |
|
|
|
|
PETROL 8.875 08/01/2004 |
8.875 |
08/01/04 |
Corp |
Baa2 |
BBB |
|
|
|
|
PETROL 7.75 08/15/2015 |
7.75 |
08/15/15 |
Corp |
Baa2 |
BBB |
|
|
|
|
MALAYS 8.75 06/01/2009 |
8.75 |
06/01/09 |
Govt |
Baa2 |
BBB |
|
|
|
|
MALAYS 7.5 07/25/2011 |
7.5 |
07/25/11 |
Govt |
Baa2 |
BBB |
|
|
|
|
TELMAL 8 12/07/2010 |
8 |
12/07/10 |
Corp |
Baa2 |
BBB |
|
|
|
|
TENAGA 7.625 04/02/2011 |
7.625 |
04/02/11 |
Corp |
Baa2 |
BBB |
|
|
|
|
PHILIP 8.875 04/15/2008 |
8.875 |
04/15/08 |
Govt |
Ba1 |
BB+ |
|
|
|
|
PHILIP 8.75 10/07/2016 |
8.75 |
10/07/16 |
Govt |
Ba1 |
BB+ |
|
|
|
|
PHILIP 9.875 01/15/2019 |
9.875 |
01/15/19 |
Govt |
Ba1 |
BB+ |
|
|
|
|
PLDT 8.35 03/06/2017 |
8.35 |
03/06/17 |
Corp |
Ba2 |
BB+ |
|
|
|
|
PLDT 10.625 06/02/2004 |
10.625 |
06/02/04 |
Corp |
Ba2 |
BB+ |
|
|
|
| PHILIP 9 11/14/2005 | 9 | 11/14/05 | Govt | Ba1 | BB+ |
|
||
|
PHILIP 8.6 06/15/2027 |
8.6 |
06/15/27 |
Govt |
Ba1 |
BB+ |
|
|
|
|
PHILIP 9.875 03/16/2010 |
9.875 |
03/16/10 |
Govt |
Ba1 |
BB+ |
|
|
|
|
PHILIP 10.625 03/16/2025 |
10.625 |
03/16/25 |
Govt |
Ba1 |
BB+ |
|
|
|
|
PHILIP 8.5 08/11/2004 |
8.5 |
08/11/04 |
Govt |
NA |
BB+ |
|
|
|
|
THAI 7.75 04/15/2007 |
7.75 |
04/15/07 |
Govt |
Baa3 |
BBB- |
|
|
|
|
BANKOK 9.025 03/15/2029 |
9.025 |
03/15/29 |
Corp |
Ba3 |
B+ |
|
|
|
|
BANKOK 8.75 03/15/2007 |
8.75 |
03/15/07 |
Corp |
Ba3 |
B+ |
|
|
|
|
TAC 8.375 11/04/2006 |
8.375 |
11/04/06 |
Corp |
B2/*+ |
BB |
|
|
|
|
DBSSP 7.875 04/15/2010 |
7.875 |
04/15/10 |
Corp |
Aa3 |
A- |
|
|
|
|
SPOWER 7.25 04/28/2005 |
7.25 |
04/28/05 |
Corp |
NA |
AAA |
|
|
|
|
PSASP 7.125 08/01/2005 |
7.125 |
08/01/05 |
Corp |
Aa1 |
AAA |
|
|
|
|
DBSSP 7.875 08/10/2009 |
7.875 |
08/10/09 |
Corp |
Aa3 |
A- |
|
|
|
|
DBSSP 7.125 05/15/2011 |
7.125 |
05/15/11 |
Corp |
Aa3 |
A- |
|
|
|
