Emerging Asian Debt

[HenryTo]

It is not only asset-backed securities, munis, or now even agencies. Even though EM equities have done okay, EM debt spreads are now hitting record highs for this cycle (we are now also seeing widening spreads between the "riskier" countries of Italy and Greece in the Euro Zone versus that of Germany). At some point - a coordinated response will come - as this is no longer a US-only issue.
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Emerging debt-Asian bonds slide, spreads hit record highs

HONG KONG, March 7 (Reuters) - Asian bond prices dived on Friday and spreads hit record highs after another bout of U.S. recession fears and more signs of trouble at U.S. mortgage lenders set off a retreat from emerging markets.

Investors dumped riskier assets and fled to the safety of U.S. Treasuries, although trading volumes were thin ahead of Friday's monthly U.S. jobs report.

"The only trade in town is in short-end Treasuries -- that's what people are piling into, that's the place to be," said a Hong Kong-based fund manager.

The JP Morgan Asia Credit Index (JACI) <JACI=JPHK> spread over U.S. Treasuries -- an important indicator of risk aversion -- surged to a record high of 320 basis points over U.S. Treasuries. It was around 240 bps at the start of the year and around 175 bps in August, when the credit crunch began.

The yield on the two-year U.S. Treasury note <US2YT=RR> dropped to 1.46 percent, the lowest since March 2004 and near the lows of July 2003.

Analysts said investors' frazzled nerves were additionally frayed by a report on Thursday that showed U.S. mortgage foreclosures hit a record high in late 2007 and by news that Thornburg Mortgage Inc (TMA.N: Quote, Profile, Research), a "jumbo" mortgage lender, was in default.

Thornburg failed to meet creditor demands for more upfront cash and its shares plunged by more than half.

"News of missed margin calls at a listed mortgage-bond fund, rising U.S. mortgage delinquencies, record foreclosures, plus record high yields on mortgage-backed securities expose a deepening crisis in the mortgage markets that Fed accommodation may be unable to forestall," said Brett Williams, a BNP Paribas analyst.

Analysts said that the heavy buying of U.S. short-end Treasuries reflected both the flight to quality and expectations of an aggressive easing by the Fed.

The U.S. Federal Reserve Chairman Ben Bernanke has said the Fed would act as needed to ensure beleaguered housing and credit markets do not further undermine an already sluggish economy and markets are pricing in another U.S. rate cut later this month.

According to a Reuters poll done last week, a majority of respondents now expect the Fed to cut the federal funds rate by 50 basis points to 2.50 percent on March 18.

"Look at the 2-year yield ... the market is telling the Fed that they want to see the overnight rate at 1.5 percent at the end of this easing," said a credit analyst in Hong Kong.

Philippine bonds, among the most active in the region, lost half a point to three-eighths of a point as investors squared positions ahead of Friday's U.S. jobs report.

Economists expect the report to show non-farm payrolls rose by 25,000 in February, recovering from a drop of 17,000 in January.

Philippine bonds due in 2032 <718286BD8=RRPS> were quoted at 96/96.25 cents to a dollar and 2031 <PHIGLB31=RR> bonds fell to 109.875/110.125.

The country's five-year credit default swaps (CDS) <PHILP5UA=GFI> -- or insurance-like contracts that protect against defaults or restructuring -- were quoted at a wide 245/258 bps. They were trading at 236/240 bps on Thursday.

FIVE-YEAR CREDIT DEFAULT SWAPS

Bid/Ask spread

Current Week ago Korea Dev Bank 105/120 105/120 Hutchison 154/~ 138/~ PCCW-HKT 187/~ 185/~ China 63/~ 58/~ Indonesia ~/250 233/~ Korea 84/~ ~/84 Malaysia 86/~ ~/85 Philippines 250/250 ~/240 ~ no bid or ask spread For CDS prices double click on GFICDS

[rffrydr]

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