Asian bonds slide as credit worries mount

Asian bonds slide as credit worries mount

Hong Kong: Asian bonds slid further on Thursday (16 August) as losses mounted in global equity markets amid concerns that worldwide credit conditions were rapidly tightening.

In the latest sign of a liquidity squeeze, the biggest US residential mortgage lender Countrywide Financial Corp. was forced to sell commercial paper at a substantially higher cost in order to get short-term funding.

A Merrill Lynch report raised the prospect that Countrywide could face bankruptcy, and the firm’s shares closed down 13%, helping to drag Wall Street sharply lower.

The Dow Jones industrial average dropped 1.29% to 12,861.47. It has fallen 8% below its record close. Asian stocks also slid on Thursday.

Asian credit spreads widened and prices fell sharply in illiquid trade today. Traders said bid and ask levels were very wide, reflecting an uncertain investor outlook.

“The market has frozen. Nobody wants to trade -- everyone is hoping things will turn around. The bids are there hoping someone will panic," said a Singapore-based trader.

Bonds from ports-to-telecoms conglomerate Hutchison Whampoa due in 2033 considered a high grade benchmark, widened 2-3 basis points (bps) to 190/185 bps.

In another sign that leveraged trades were unwinding, the yen rose to a near five-month high against the dollar and euro as investors who had borrowed the low-interest rate currency to buy riskier but higher-yielding assets continued to unwind their positions.

In the sovereign segment, Philippine bonds fell by one to one-and-a-half points at the long end.

Bonds due in 2032 were bid at 94.75 cents to a dollar, and 2031 bonds were at 106.50.

The cost of insuring Philippine debt soared, with Philippine five-year credit default swaps (CDS) -- insurance-like contracts that protect against defaults and restructuring -- widening to 210/215 bps from 192/197 bps.

“If the Dow Jones breaks 12,800 we could see it go down quickly to 12,500, in which case the ROP 2031 will easily break 105 -- it will be a bloodbath," said a Manila-based trader.

Reflecting heightened risk aversion towards emerging market assets, spreads of emerging market sovereign bonds over U.S. Treasuries an important measure of risk appetite, widened by 3 bps to 225, following an overnight 7 bps widening.

Analysts said much of the illiquidity in markets and the wide bid-ask spreads were related to the unpredictable impact of the U.S. subprime mortgage crisis.

“There is a lot about the current credit crunch that markets just don’t understand. It’s going to take weeks, maybe months, until there is a level of clarity in the markets which will allow for more concrete investment decisions," said Rob Gvozden, head of credit strategy for non-Japan Asia at Barclays Capital.

Indian banks, the most active issuers this year, were slammed. Perpetual bonds of ICICI Bank, India’s No. 2 lender, blew out to 405/360 bps over US Treasuries from 345/355 bps earlier this week.

And although Asian credits have suffered less than their European and US peers, analysts said that outperformance could fade if global market weakness persists.

“The fact that Asian credits have performed relatively well compared to other regional peers is a potential risk factor if market performance worsens in the near term," said Gvozden.

“That relative outperformance makes Asian credits look relatively expensive and, therefore, vulnerable to opportunistic selling," he added.

Five-year credit default swaps

Bid/Ask spread,25,44,56

Coupon Maturity Bid price Bid spread