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Raghuram Rajan sweet talk leads to rally in Asian credit markets

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Credit markets bounced in positive reaction to first statements of Raghuram Rajan, pushing financial markets higher. (AP) Credit markets bounced in positive reaction to first statements of Raghuram Rajan, pushing financial markets higher. (AP)
SummaryCredit markets bounced in positive reaction to first statements of Raghuram Rajan, pushing financial markets higher.

Asian credit markets bounced today in a positive reaction to the first statements of the new governor of the Reserve Bank of India, pushing the region's financial markets higher.

Raghuram Rajan grabbed the spotlight yesterday in announcing several measures to lighten regulation on the banking system in India.

His statement buoyed the local stock market with the BSE Sensex almost 2 pct higher around 4:30pm Singapore time. Indian bonds were also better bid and most of the corporate curve in dollars from the country was some 5bp-10bp tighter.

Private banking accounts and offshore institutional Indian investors were showing interest, especially in 5-year paper from banks. As a result, benchmark State Bank of India 2018s were last quoted at 345bp/330bp, though ICICI 2018s were more liquid, quoted at 378bp/373bp, 5bp tighter in the day.

"It feels like people are finally back at their desks and are giving India a proper thought," said one trader in Singapore. A credit analyst, however, warned that this might be a short-lived bounce.

"We know that the problems for Indian credits are still there, this has not changed with Rajan's statement," he warned.

For now, though, the feel-good factor has spilled over and helped tighten the whole region. The Asia ex-Japan iTraxx IG index was closing the day some 6bp tighter at 150bp/153bp, partly helped by some buying as index investors prepare for its roll.

The new 10-year bonds from the Republic of Korea also performed well and ground tighter throughout the day. One trader said that he had seen the last trade at 107bp over Treasuries, or 8bp tight to the reoffer spread of 115bp, around 4:35pm Singapore time.

Korea sold a USD1bn 10-year bond last night during the New York session, its first appearance in the dollar market since 2009. "Compared to the CDS and where the policy banks trade, the deal was offered at a generous level," said the credit analyst.

High-yield also had help from the general mood and sector bellwether Country Garden 2018s closed the day about USD1 higher at 94.00/94.50.

The move happened in spite of negative calls from analysts on sub-investment-grade bonds in the region.

Today, Morgan Stanley circulated a note downgrading Asian high-yield to underweight from neutral saying that: "We believe Asia is heading into a more adverse part of the credit cycle characterised by slower growth and tighter credit availability, which will negatively impact already highly leveraged balance sheets. This takes place

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