Asian sovereign and corporate bonds rebounded slightly on Wednesday after a recent sell-off on stronger stock markets, but spreads stayed close to record levels due to worries over the unwinding of structured credit products.
Credit markets saw limited impact from Warren Buffett's offer on Tuesday to reinsure $800 billion of US municipal debt guaranteed by bond insurers, given expectations the plan would not erase risks in the beleaguered sector.
The widely-followed iTRAXX Asia ex-Japan high-yield index - an important measure of risk aversion - tightened at first but widened later in the morning to 560 basis points (bps), close to a record 562 hit on Tuesday, a Hong Kong-based trader said.
"Although the markets are better on the equities' rally, credit markets continue to lag," said the trader. Credit analysts were cooler on the Buffett offer as it would charge premiums of 50 percent above what the bond insurers are receiving from issuers on the policies, and leave them with fewer safe assets to offset risk from their toxic ones.
Bond insurers are seeing their top credit ratings at risk as they are expected to make billions of dollars in payments in the future after guaranteeing products like collateralised debt obligations (CDOs) and other risky debt. Asian credit spreads have surged to a record wide this week, indicating the acute risk aversion in the region, amid fears investors were unwinding structured credit products such as CDOs.
The global loan markets are also facing difficulties, with prices in Europe's secondary cash trading market sinking on Tuesday to new lows of 87.27 percent of face value.
Philippine sovereign bonds, among the most actively traded in the region, were slightly higher on the back of gains in equities, though trading volumes were thin. Philippine bonds due in 2032 were quoted at 97.625/98, while bonds due in 2031 were at 111.125/111.5. The country's five-year credit default swaps or insurance-like contracts that protect against defaults of restructuring, were unchanged at 235 basis points.