Asian sovereign credit default swaps widened on Monday as worries about Greece's debt crisis raised the cost of insuring government debt and made investors averse to buying riskier assets. Risk appetite for emerging market assets soured amid uncertainty whether eurozone states would agree to a support package to aid debt-stricken Greece at a summit later this week.
But Asian sovereign CDS continue to outperform their European counterparts and, despite lower credit ratings on some of the Asian names, are trading tighter than those in Europe. "Asian sovereigns have maintained stronger fundamentals, both from a growth perspective and a fiscal standpoint," said Yang-Myung Hong, sovereign credit analyst with Nomura International.
But he added that beyond a point Asia would not be insulated from the widening trend in Europe because of the valuation gap. "A significant widening in Europe could lead to Asia moving higher as well, although not to such a large extent as Europe," he said.
Indonesia's 5-year CDS moved out to a mid-point of 159 basis points (bps) from around 152 bps on Friday while South Korea widened 5 bps to 80 bps. In the broad market, the Asia ex-Japan iTraxx investment-grade index was quoted at 95/97 bps compared with Friday's 93/95. The new series of the index which rolled out on Monday was quoted at 100/107 bps, with the roll being worth 4.5/7.5 bps.
The Thomson Reuters Index of Asia emerging credit was quoted at 176.23 on a simple average basis and at 111.57 on a weighted average basis. Bonds from Philippines, the region's most active sovereign issuer in the dollar bond market, also weakened as investors worried about valuations as these bonds are just off all-time highs.
The bonds due in 2034 were quoted at 98.5/98.875 cents on the dollar after being traded at 99. The bonds sold in October last year at 99.382, were traded at a high of 100 last week. Philippine bonds due in 2020 were traded at 107.625 before trading weaker at 107.5/107.875.
These bonds were three-eights to half a point lower compared with Friday. Philippine 5-year CDS were quoted at 163/167, and are beginning to trade wider than Indonesian CDS even though both countries are in the BB rating category. Investors are worried that Manila will have to scramble to bridge a fiscal deficit gap, which is likely to be wider than initial estimates.
Asia's largest sovereign issuer of offshore bonds may post its second successive record budget deficit this year, and there is concern that The Philippines next president will have to raise taxes sooner rather than later to prevent a financial crisis soon after the May elections.