Asian bond spreads widened on Friday after a bigger-than-expected quarterly loss by Merrill Lynch and weak results from US blue chips such as Microsoft highlighted the risks to the world's largest economy. But a continued slide in oil prices eased inflation fears in Asia, keeping spreads from widening too much.
Citigroup's quarterly results due out later in the day will provide more clues on the health of the US financial sector, which is reeling from continued writedowns linked to the crisis in the housing and credit markets. The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, widened by about 7 basis points (bps) to 556/561, while the investment-grade index moved out by 5 bps to 152.
"People are still shorting the market and unwilling to remove these shorts," said a Hong Kong-based trader, adding that other investors were selling whenever prices ticked up. After hitting a record above 650 before the rescue of US investment bank Bear Stearns in March, the iTRAXX index enjoyed a recovery until late May, but intensifying risk aversion in global markets has since pushed out spreads again.
Asian credit markets have suffered from intense volatility in a month in which the US government offered a rescue plan for beleaguered mortgage lenders Fannie Mae and Freddie Mac and took over IndyMac Bancorp Inc. AT the same time, rising inflation in the region and slowing economic growth are keeping Asian investors on edge.
The Philippines' five-year credit default swaps (CDS), insurance-like contracts that protect investors against default, widened by around 5 bps to 260. The weakening Asian credit market has made issuers reluctant to offer new bonds, with no new deals announced since Philippine conglomerate SM Investments Corp priced a $350 million, five-year deal last week.