The cost of protection against a default in Asian debt surged on Tuesday after US lawmakers rejected a $700 billion bailout plan for the financial industry, depriving credit markets of a much needed dose of confidence. The difference between bids and offers ballooned as well, signalling a thinly traded market in which there were far more buyers of protection than those willing to sell.
The iTRAXX Asia ex-Japan high yield index, a key measure of risk aversion, was bid at 660 basis points (bps), widening by 40-50 bps from Monday's levels. But the index was offered at 760, marking an unusually high difference. Traders noted part of the reason was a struggle by investors to determine a fair value for the index, which rolled over into a new series 10 this week as part of the biannual changes to its composition by compiler Markit.
But it also reflected the uncertainty gripping the credit markets after the US House of Representatives unexpectedly rejected the rescue plan that would have led the US government to buy bad debt from the financial system. "We are in a one-sided market right now. There's plenty of buyers of protection, but few willing to sell. In terms of cash bonds, there's virtually no trading," said a Hong Kong-based trader.
"The bailout plan is definitely needed to restore confidence. Until then, we are pretty much in no man's land," he added. The equivalent investment-grade index widened by 20 basis points to around 233, the trader said. Among the worst hit was South Korea, which saw the cost of protection surge after posting a record current account deficit in August, which dealt a severe blow to the country's already ailing currency. South Korea's five-year credit default swap (CDS) surged 40-50 basis points to 210 on the news.