Hong Kong: Asian bonds were slammed on Friday, 10 August, as fresh credit woes rocked global financial markets, prompting major central banks to increase the funds available to meet demand for cash and other liquid assets.
Trade was thin and most of the activity was limited to buying credit default swaps (CDS) — insurance-like contracts that protect against defaults and restructuring.
“The dollar credits are in the eye of the storm and will continue to be hardest hit in the fixed-income asset class in Asia,” said David Fernandez, head of Asia research at JP Morgan.
“By and large it is the same investors who are involved with the problems that we are seeing in the US and Europe. They are the ones who may have to liquidate their positions,” he said.
Bonds from ports-to-telecoms conglomerate Hutchison Whampoa due in 2033, considered a high-grade benchmark, widened to 185/178 basis points (bps) over US Treasuries from Thursday’s 169/163 bps.
Fears of a wider impact from the U.S. mortgage problems rose after France’s BNP Paribas froze $2.2 billion worth of funds exposed to the subprime sector as liquidity in some segments of the US securitisation market evaporated.
That led to several central banks taking steps or pledging to act to pump additional cash into the system to head off a credit crunch.
The European Central Bank injected a record $130.6 billion into Europe’s money markets and the US Federal Reserve pumped in a higher-than-usual $24 billion in its regular operations, although analysts said that did not amount to an emergency injection of liquidity.
Similar moves were seen in the Asia-Pacific region. Both the Bank of Japan and the Reserve Bank of Australia injected higher levels of funds via money market operations.
Reflecting the risk aversion towards emerging market assets, spreads of emerging market sovereign bonds over US Treasuries, an important measure of risk appetite, widened 4 basis points to 208 after a 9 basis point move on Thursday.
The spreads are approaching the level of 226 basis points struck last month, which is the widest in a year.
“There is a lot of nervousness but Asia is outperforming because the region is not that exposed to subprime and corporate fundamentals are solid,” said a Hong Kong-based fund manager.
He added that most of the weakness was in the CDS market.
Philippine five-year credit default swaps (CDS) blew out to 193/200 bps, 13 bps wider than New York levels and compared to Thursday’s level of 152 bps in Asia.