HONG KONG -- Asian bond spreads widened on Thursday after Wall Street's tumble took US stocks to their lowest in five and a half years and with prospects fading fast for a congressional bailout of the US auto industry.
Investors are also worried the global economic downturn could be deeper than previously expected after the release of more gloomy official data.
The Asia ex-Japan iTRAXX investment-grade index, a key measure of risk aversion, widened by 20 basis points (bps) to 430/470, setting a new high for the month. However, it is still far below a record of just under 650 hit in late October.
"The markets are still worried about what will happen to the US automakers, corporate earnings," said a Manila-based trader.
Automakers facing a rapidly worsening liquidity crunch are urgently seeking help now to avert what industry executives say could be the failure of one or more of the Big Three US automakers.
But US leaders are now sounding downbeat about the prospects of extending $25 billion in aid to General Motors Corp., Ford Motor Co. and Chrysler LLC.
GM Chief Executive Rick Wagoner said without injections of liquidity, parts of the domestic car industry may not survive.
Meanwhile, The Federal Reserve slashed its US growth forecasts, US consumer prices fell at a record pace last month, and Japan's October exports fell by the most in seven years.
Despite the rapid widening of credit spreads and the sharp fall in bond prices, trading activity remained thin amid uncertainty about valuations.
"There is no matching and no clearing levels -- everyone is bidding low and offering high," said a Singapore-based trader.
Although credit default swaps spreads continued to be much lower than bond spreads for the same entity and for matching maturities, there were few arbitrage trades.
Investors holding cash bonds usually swap their holdings to earn a floating rate of interest plus a fixed spread if they want to eliminate interest rate risk and just want to remain exposed to the credit risk.
They can further eliminate the credit risk by buying credit default swaps -- insurance-like contracts that protect against defaults and restructuring.
"Thin trade in cash bonds, which have already cratered, implies basis should perform in the CDS widening that is indicated this morning," said Brett Williams, credit analyst with BNP Paribas in a client note.
"Scant liquidity and bid-offer canyons in cash bonds, however, impart downside risks to harvesting any basis gains," the note said, explaining why there were few arbitrage trades.
Even bonds from the Philippines -- the most active sovereign debt issuer in Asia outside of Japan -- reported thin trades as investors now are focused on the government's traditional annual issuance.
Philippine five-year credit default swaps (CDS) was quoted at 540/575 bps after trading at 550 bps. This compares with Wednesday's 480 bps.
Its 2031 bonds dropped to 81/86 cents to a dollar compared with 86 cents to a dollar.
"The market is waiting for the government's new issuance, which will take place in Q1 next year. They have to give very attractive rates," said the Manila-based trader.
