Asian bonds weakened on Monday as crude oil price extended its relentless upsurge keeping investors worrying about its impact on already-high inflation and the subsequent monetary policy response from central banks. Weaker stock markets also added to the gloom amid growing fears that tepid demand and rising cost of inputs will hurt corporate earnings.
The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, widened to 531/536 basis points from Friday's close of 511/516 bps. The equivalent iTRAXX investment-grade index moved out to 142/149 bps from 133/136 bps.
Meanwhile, markets brace for comments from the US Federal Reserve after its two-day policy meeting that starts on Tuesday, where it is expected to keep rates steady at 2 percent.
"No hike is expected by our strategy team, and futures bets have been halved for a hike to just a 10 percent chance," said BNP Paribas credit analyst Brett Williams."The big deal will be language signals for the August 5th and September 16th meetings."
The MSCI index of Asian stocks outside Japan fell 0.8 percent, after dropping at one point to its lowest since March 25. The index has fallen for five straight weeks and is down more than 17 percent this year. Asian dollar bonds have a high correlation to equity markets because of concern that lower corporate earnings and higher inflation could dent national finances and corporate credit profiles in the region.
The Philippines' five year credit default swaps, or insurance-like contracts that protect against defaults or restructuring, widened by 5-8 bps to 250/255 bps. Cash bonds also suffered - bonds from Manila due in 2031 were down a quarter of a point at 106.25/106.75 cents to a dollar.
Meanwhile, new bond issues continue to flow into the market despite volatile conditions as investor reaction to new offerings has been mixed. South Korean retailer Shinsegae Co sold bonds on Friday due in 2011 to raise $200 million at a price of 210 bps over US Treasuries, 10 bps tighter than the earlier guidance. A source close to the deal said the bonds' order books were subscribed over 2.75 times the offer size. Asia received allocations of 78 percent and Europe took the rest.
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