spread the spreads to thin

EMERGING DEBT
Asian spreads widen
Mood remains cautious
(PDI, 10.21.08)

HONG KONG -- Asian bond spreads widened on Tuesday as investors waited for more signs of a thawing in credit markets and as they gauged the effectiveness of recent government measures to avert a deeper global financial crisis.

The rising cost of protection was led by the continued weakening sentiment for Asian sovereign debt, especially for countries with weaker current account positions such as South Korea, given concerns that regional growth is bound to slow.

In buying protection, investors ignored the global equity markets, with thin trading volumes further showing their lack of conviction in Asian credit, dealers said.

Another uncertainty remains Tuesday's deadline to settle about $400 billion in credit default swaps (CDS) on debt in failed firm Lehman Brothers, though derivatives analysts said it was unlikely to trigger new havoc.

"People at first expected to see some tightening today based on the gains in equity markets overnight, but it's not happening," said a Hong Kong-based dealer. "I think it's clear credit markets are being much more cautious, and we are not seeing much trading today."

The iTRAXX investment-grade index widened by some 20 basis points (bps) to 345. Reliable quotes for the equivalent high yield were harder to get given the thin liquidity, traders said, though one placed the bid at around 975 bps.

Spreads have remained wide in Asia despite recent government measures to prop up their respective banking sectors and to inject liquidity into the financial system.

Signs of improvements in short-term money markets and U.S. Federal Reserve Chairman Ben Bernanke's backing of more U.S. government spending renewed hopes on Monday that the worst of the financial crisis may be over.

But that failed to sway credit investors in Asia.

South Korea's five-year CDS, insurance-like contracts that protect against defaults and restructuring, widened 20-30 bps to 390 on continued worries about its exposure to short-term overseas funding and its current account deficit.

President Lee Myung-bak said on Tuesday the global downturn has made South Korea's economic challenges graver than during the Asian financial crisis a decade ago.

China's five-year CDS widened by some 15 basis points to 145, as investors remain concerned after the country said on Monday economic growth slowed to 9.0 percent in the third quarter, leaving it on course for its first year of single-digit expansion since 2002.

The Philippine 5-year CDS widened to as high as 465 from 415/445 bps on Monday, while Malaysia's CDS widened by some 30 bps to 245.