Asian spreads near records, recession fears linger

Asian bond spreads reversed initial tightening seen earlier on Monday to remain near last week's records amid continued fears that a global recession would hit emerging markets especially hard. The initial narrowing of spreads was undone as Asian stocks slumped for a fourth session despite policy actions on Monday that included South Korea's biggest ever interest rate cut.
A broad sell-off in emerging stock and currency markets is spurring investors to buy more protection against defaults in sovereign debt, a segment of the Asian credit markets that has shown signs of life in a market in which little else is trading.
"The psychology of fear aggravating the currency and capital markets impedes price discovery and formulation of a coherent credit investment strategy," Brett Williams, a credit analyst at BNP Paribas, wrote to clients. The iTRAXX investment-grade index, a key measure of risk aversion, initially tightened to 610 basis points but moved out again to near record levels of around 630 basis points hit on Friday, according to a Hong Kong-based trader.
The equivalent high-yield index was also range-bound at around 1,250 basis points, the trader said. The cost of protection against defaults in Asian debt has surged, hitting distressed levels in some cases. The widening has been more pronounced for countries with current account deficits and sliding currencies that makes servicing dollar- or euro-denominated debt more expensive.
South Korea's five-year credit default swaps (CDS), or insurance-like contracts that protect against defaults or restructuring, widened by some 80 basis points to 680, tracking a continued slump in the country's financial markets. Investors appeared sceptical about the immediate impact of a 75 basis points rate cut by the Bank of Korea on Monday. The action came after an emergency meeting on Monday.
Indonesia has been another country whose debt spreads have surged and its rupiah currency slumped due to worries about its balance of payments and the impact of a global slowdown on its exports. The country's five-year CDS had tightened to as much as 1,150 basis points early on Monday but had moved out to around 1,250 bps later in the morning, at similar levels to Friday.
Malaysia's five-year CDS was range-bound at 430 basis points in a muted reaction after the country's central bank left its key interest rates steady on Friday. Financial markets in the country were closed on Monday for a holiday.