Asian bond spreads widened on Thursday towards record levels on fading optimism over the US Federal Reserve's measures to inject liquidity to improve strained credit market conditions.
Spreads were also hit after a unit of US private equity firm Carlyle Group said it was unable to reach an agreement with lenders on margin calls worth more than $400 million, making it likely that it will default on its remaining assets.
The iTRAXX Asia ex-Japan high-yield index - an important measure of risk aversion - widened by some 20 basis points (bps) to 615 by mid-morning, two traders said, approaching the record of about 640 hit on Tuesday. The investment-grade iTRAXX index widened by a similar amount to 210 basis points, the traders said.
"There are doubts about the effectiveness of the Fed's measures, and credit markets are not taking those measures in a very favourable light. And now, we've also got a whole lot of other factors," said a Hong Kong-based trader.
Asian sovereign and corporate bonds have weakened towards peak levels this week as investors fear more losses at global lenders and a US-led slowdown in the global economy.
Analysts believe that investors will not return to credit markets unless they can regain some of the trust they've lost in areas such as credit ratings. That may prove harder on Thursday after Carlyle Capital Corp said it was unable to reach an agreement with lenders, who are now likely to take possession of its remaining assets.
Carlyle Capital has defaulted on about $16.6 billion of its debt and said the only assets held in its portfolio as of Wednesday were US government agency AAA-rated residential mortgage-backed securities. But Philippine bonds, among the most active in the region, held relatively steady, with investors awaiting key US economic data due this week, including February retail sales on Thursday and consumer prices on Friday.
Bonds from Manila due in 2032 were quoted at 95.75/96.125 cents to a dollar, while 2031 bonds were steady at 109.5/110, the trader said. Among individual names, the cost of insuring SK Energy, fell slightly after Standard & Poor's upgraded its ratings on the South Korean oil refiner by one notch to "BBB" from "BBB-".
SK Energy is now at the second-lowest investment-grade rating. Its five-year credit default swap - or insurance-like contracts that protect against defaults - was last quoted at 185/200 basis points, down 2-3 bps from Wednesday's levels.