The cost of protection against a default in Korea Development Bank's (KDB) debt surged amid speculation it was looking at acquisition opportunities, bucking the trend of tighter spreads elsewhere in the region on Monday. KDB's five-year credit default swaps had widened by 15-20 basis points (bps) to about 150 after a spokesman at the state-run bank said on Friday it was studying options that included an investment in beleaguered Lehman Brothers.
Though the spokesman did not specify whether it was seeking a controlling or minority stake in Lehman, credit investors were nonetheless concerned it would look into other potential acquisitions. "The talks about the KDB-Lehman tie-up sent spreads wider though we are beginning to see levels come down again," said a Hong Kong-based trader.
Some option players last week appeared sceptical that KDB would pursue a take-over of Lehman, taking advantage of the stock's jump on Friday to place bets that the gains would not hold. But the mood was more optimistic across Asian credit markets as inflation fears eased after oil prices extended a slump from its record above $147 a barrel hit in mid-July amid expectations for weakening global demand.
Crude was trading little changed at $114.55 as of 0400 GMT, after dropping $6.59 a barrel on Friday. The iTRAXX Asia ex-Japan high-yield index a key measure of risk aversion, tightened by 10 basis points to 552, while the equivalent investment-grade index narrowed by about 5 bps to 153. Despite the slump in crude prices, investors remain cautious about the near-term outlook for Asian credit markets given signs of weakening economic growth in the region.
Thailand said on Monday economic growth slowed to a seasonally adjusted 0.7 percent in the second quarter of 2008, missing consensus forecasts. But the country's economic planning agency raised its full-year growth forecast on healthy exports and government stimulus measures, while also raising its expectations for inflation.
Thailand's five-year CDS were 2 basis points tighter at 121 shortly after the data. Among other sovereign credits, Malaysia's five-year CDS were rangebound at 117 bps ahead of the central bank's policy meeting on Monday.
Seven out of 14 economists polled by Reuters expected the main rate to remain on hold at 3.50 percent where it has been for over two years now, while seven expected Bank Negara to raise the rate by a quarter of a percentage point. Malaysia's annual inflation surged to 8.5 percent in July, data showed on Friday, well above expectations, and the country announced a surprise cut in fuel prices on the same day.