Asia Rates: Tightening in KRW-USD Xccy Basis and strong IndoGB demand

Tighter Korean cross-currency swaps; Robust Indo bond demand
Group Research, Duncan Tan01 Feb 2023
    Photo credit: Unsplash Photo

    KRW Rates - 4Q's liquidity/credit stress in Korean money markets have eased in January, earlier and faster than we had previously expected. 3M CD's spread over MSB has fallen to a mere 19bps at end-January. 

    KRW-USD cross-currency basis (1Y and beyond) has tightened. Because of the large rally in Korea rates and FX over the last 3 months, investors holding KTBs on unhedged basis may have decided to pay CCS to reduce exposures to Korea rates and FX. We also note that Korean's corporates' offshore bond issuances were outsized in January at around USD10.6bn. This is large compared to the usual monthly issuance sizes of USD0-4bn. There could have been increased cross-currency swapping back to KRW, on the back of these offshore bond issuances. As a result of the tightening in cross currency basis, KTB's asset swap spreads have significantly compressed, suggesting that foreign purchases of KTBs could remain weak in the near-term.

    IDR Rates - Bond demand at yesterday's conventional auction was strong. Total incoming bids amounted to IDR67.1tn, higher than IDR59.0tn for 17 Jan and IDR28.3tn for 3 Jan auctions. The lion share of incoming bids continue to be for the 5Y (FR95) and 10Y (FR96), with both seeing around IDR21-22tn of bids each. The flatness of the bond curve mean that there may not be much investor incentive to extend duration to the 15Y, 20Y or 30Y. Awarded size came in at IDR23tn, same as indicative target. Considering the large incoming bids and that there was no upsize, yield cut-offs were naturally very low within bidding ranges. In particular, the 5Y (FR95) cut-off at 6.35%, at the floor of 6.35-6.56% bidding range and several bps lower than pre-auction market levels. The strong auction and low cut-off for the 5Y drove markets to reprice 5Y and 10Y yields 5-6bps lower during yesterday's afternoon session.

    Duncan Tan

    Rates Strategist - Asia

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