Asian bond spreads widen

Asian bond spreads moved out on Tuesday as the sharp tightening in the previous session was seen as overdone in light of expectations for more weakness in the US housing sector and global economy. Spreads had tightened sharply on Monday after the US government seized control of Fannie Mae and Freddie Mac, providing temporary relief from recent concerns over the US housing sector and the broader global credit markets.
Domestic risk factors also pushed out spreads on Tuesday. Thailand faces continued tension among protesters and the government, while South Korea has been hit by concerns foreign investors will exit the country after about $7 billion of local currency bonds mature on Tuesday and Wednesday.
A potential raft of new supply was behind the weaker credit markets as well, traders said. South Korea itself is in the midst of a global roadshow to market a sovereign bond of up to $1 billion, in its first such sale in two years. Global stock markets rallied on Monday following news of the take-over of the US home mortgage financing providers, but had given up some of those gains by Tuesday.
A broad measure of risk aversion in the region, the iTRAXX Asia ex-Japan high-yield index widened by 12 basis points to 560, after at one point tightening as much as 35 basis points on Monday, a Hong Kong-based trader said. The equivalent investment-grade index widened by 8 basis points to 161/163.
The cost of protection against a default in Thailand's sovereign debt increased on Tuesday, with the five-year credit default swap (CDS) widening by 8-9 basis points to about 145.Thailand's CDS spreads have widened by some 25 basis points since protests against the government began in late August, under-performing an iTRAXX investment-grade index that has remained range-bound after undergoing tremendous volatility.
South Korea's five-year CDS widened by 6 basis points to 130 ahead of its expected sale of a new 10-year bond this week. Its spreads have widened this month amid fears of imminent and massive capital flight out of the country.
But foreign investors have already bought more than a net $1 billion in domestic South Korean bonds this month, according to official data on Tuesday, easing some of those concerns. Meanwhile, illiquid Pakistan five-year CDS remained stuck at around 940 basis points as investors worry about the security and economic problems in the country.