Asian bond spreads widened on Friday amid concerns about a deep slowdown in the global economy, despite hefty interest rate cuts by central banks world-wide. Weak corporate outlooks, bleak US retail sales data, and an International Monetary Fund forecast for an economic contraction were among the latest indicators of a potentially prolonged global slump.
These concerns persisted even after Britain and Europe slashed interest rates on Thursday, while South Korea's central bank cut rates for the third time in a month on Friday as policy makers grapple with the worst financial crisis in decades.
"We have a pattern in which we have a good few days, and then we see profit-taking or risk reduction," said a Singapore-based fund manager for a major foreign asset firm. The iTRAXX investment-grade index a key measure of risk aversion, widened about 30 basis points to 380. The index still ended about 30-40 bps tighter for the week, following a significant tightening seen early this week.
Though sentiment has improved significantly since late October, when the iTRAXX investment-grade index had touched a record of just under 650 bps, investors are still bracing for periods of volatility ahead. Global economic indicators signal more pain ahead, with investors particularly focused on US employment data for October. A Reuters poll showed expectations for losses of 200,000 non-farm jobs.
Hints of how US President-elect Barack Obama will deal with the financial crisis, including who he will appoint for key positions in economic policy, will also be key, analysts said. The new US administration takes over in January.
"Investors are going back and forth from risk reduction mode to adding more risk," said a debt syndicate investment banker for a major foreign lender in Hong Kong. South Korea's five-year credit default swaps (CDS) or insurance-like contracts that protect against defaults, widened by about 30 bps to 330, even after the central bank cut its key interest rate by a quarter percentage point to 4.00 percent, the lowest since June 2006.
Merrill Lynch predicted South Korean five-year CDS will widen to 500 basis points, pressured by an intensifying scramble for dollars in the months ahead. Protection levels had touched a record around 735 bps in late October, according to the US investment bank.
The South Korean won extended gains on Friday, with several dealers reporting suspected dollar-selling by the country's authorities. Indonesia's five-year CDS widened some 20-30 bps to 630. The country's central bank ran against the world-wide trend by keeping interest rates on hold on Thursday in an effort to shore up its currency.
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