Asian sovereign and corporate bond spreads widened on Thursday after oil prices remained stubbornly near record highs, a worrisome development in a region already struggling with inflation. The iTRAXX Asia ex-Japan high-yield index a key measure of risk aversion, widened by 15-20 basis points (bps) to 535, while the equivalent investment grade index widened by 5-10 bps to 138.
"Protection for sovereign names is rising along with rising expectations of inflation-driven domestic rates, and the transition of fiscal surpluses to deficits," said Brett Williams, a credit analyst at BNP Paribas, in an email to clients.
Lingering concerns over a global credit crunch are now being accompanied by fears about the impact of surging oil prices, which on Wednesday gained $5 to within reach of a record above $139. US crude retreated somewhat in Asian trade, down 98 cents to $135.40. Countries perceived most at risk to inflationary pressures have experienced widening spreads in their credit default swaps (CDS), or insurance-like contracts that protect against defaults.
Philippines' five-year credit default swaps (CDS) widened by 5-10 bps to 245/255, one trader said. The country's central bank raised interest rates last week to combat inflation that is running at a nine-year high. Indonesia's five-year CDS widened by about 5 basis points to around 282. The country also raised interest rates last week to combat double-digit inflation. Spreads in Indonesian debt have also widened as the country embarks on a roadshow starting on Thursday to market a new sovereign bond offering expected to be worth $1.5-$2 billion.
Though India's CDS were little traded due to the dearth of sovereign issuance in secondary debt markets, the cost of protection against defaults in the country's lenders rose following the central bank's decision to raise interest rates. ICICI Bank's CDS widened by about 5-10 basis points to as much as 320.