Asian bonds weakened on Friday after a Moody's downgrade of Citigroup raised questions how much pain financial firms still face because of soured subprime mortgage investments and how hard it will hit the US economy. Moody's downgraded Citigroup's debt by one notch, expressing doubt that the largest US bank would succeed in rebuilding its capital levels any time soon.
The action came after Citigroup announced plans to bring $49 billion of investments in structured investment vehicles (SIVs) into its balance sheets, spurring concerns that similar moves by other lenders would slash the amount of loans available to US companies and consumers.
"I don't think anybody knows what's really going on," said a Hong Kong-based trader, referring to the extent of problems in the financial sector. "There's no real conviction in the markets, and guys are pushing this way or that way to see if anybody blinks," he added.
The widely-followed iTRAXX Asia ex-Japan high-yield index - a key measure of risk aversion - moved out by 4-5 basis points (bps) to around 311, ending a volatile week on a negative tone.
Asian bond spreads have waxed and waned, widening earlier this week to what was seen as only a timid cut in US interest rates by the Federal Reserve, and then regaining ground on Thursday following a concerted plan by central banks to inject liquidity into financial systems.
Traders said Asian financial bonds had seen limited impact because the region is far less exposed to the troubled US subprime market. The more liquid corporate bonds, however, have weakened due to worries about the outlook for the US economy, Asia's top export market.
Among benchmark bonds, spreads in ports-to-telecoms conglomerate Hutchison Whampoa Ltd due in 2033 widened by some 3-5 basis points to around 188. Philippine bonds weakened slightly, with those due in 2032 quoted at 99.5/99.875 while 2031 bonds were trading at 115.5/115.875. Manila's five-year credit default swaps - insurance-like contracts that protect against defaults or restructuring - widened by 2-3 bps to 148/155.
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