Asian sovereign and corporate bond spreads widened on Tuesday as fears about a global credit crunch were revived after S&P downgraded the ratings of some major US securities firms including Lehman Brothers.
The credit concerns deepened after the Wall Street Journal on Tuesday reported Lehman may raise $3-$4 billion in fresh capital, suggesting the bank could post this month its first quarterly loss since going public.
Investors had already been skittish after US lender Wachovia Corp ousted its chief executive on Monday amid speculation that more loan losses could be in the offing, and after Britain's Bradford & Bingley issued a stark warning on the state of the British mortgage market.
"The credit concerns are here again, though by now, I wouldn't say it's a surprise," said a Hong Kong-based trader. The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, widened by about 20 basis points (bps) to 490/495.
The widening of spreads were driven primarily after Standard & Poor's downgraded Lehman, Merrill Lynch and Morgan Stanley, citing a weakening profit outlook for the beleaguered US financial sector. The cost of protection for Asian financial credits rose as a result.
ICICI Bank's five-year credit default swaps (CDS) widened by 10-15 basis points to 295. Meanwhile, Export-Import Bank of Korea's (KEXIM) CDS widened to 98 basis points, about 10 basis points wider since Friday, when rumours that the trade financing arm of the South Korean government was eyeing a $1 billion 10-year bond sale hit markets.