Asian bonds broadly weakened on Wednesday after minutes from the US Federal Reserve's last meeting stoked fears of financial gloom engulfing the world's largest economy and spilling over to other regions.
The fears wiped out the overnight uptick in prices of some credits which was inspired by the upgrade of Peru's credit rating to investment grade by Fitch Ratings. The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, widened to 545 basis points (bps) from Tuesday's 535/540 bps. The investment grade benchmark widened to around 132/135 bps from 130/133 bps.
"The market is trying to find its way back but risk reduction has set in," said a Singapore-based trader, referring to spreads declining from the record high levels of mid-March.
Minutes from the Fed's March 18 policy meeting showed the central bank's staff projected the US economy would contract in the first half and some policymakers warned that an economic downturn could be severe and prolonged. Investors and analysts are now worried that a recession in developed markets could have a more widespread impact on Asia and other emerging markets.
"The US is in recession - I have no doubt about it," said Donald Straszheim, vice chairman of US investment bank Roth Capital Partners while adding that Europe could follow soon and Japan was still struggling.
"Chinese exports will be weaker as a result," he said. Brett Williams, credit analyst with BNP Paribas, said Asia was following US and European markets lower. "Widening in US and European CDS benchmarks gathered pace, and is pushing the Asian IG (investment grade) and HY (high yield) indices wider this morning."
But he said now the focus would be on quarterly earnings from Road King Infrastructure, Hong Kong property developer Lai Fung Holdings Ltd, global consumer giant Samsung Electronics and South Korean steel maker POSCO's, which are scheduled for this week.POSCO is expected to report lower quarterly profit due to weak sales of stainless steel products, but investor focus will be on its price plan to absorb soaring raw material costs. POSCO's five-year credit default swaps - insurance like contracts that provide protection from defaults and restructuring - moved in to 88 bps from 88/90 bps.
Bonds from the Philippines, Asia's most active offshore debt issuer besides Japan, could not build on their overnight gains. Bonds from Manila due in 2032 were unchanged at 97.50/98 cents to a dollar from their overnight levels in New York, where they had gained by an eighth of a point. Philippines' five-year CDS was steady at 215/220 bps.