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Asian spreads tighten, but Thailand fears persist

Published: 02 Dec 2008 23:24:55 PST

HONG KONG, Dec 3 - Asian bond spreads tightened on Wednesday, reversing the sharp widening in the prior session, amid a recovery in equity markets and hopes central banks will aggressively cut rates in the face of a global downturn.

But the cost of protection against a default in Thailand's debt rose slightly, even after anti-government protesters ended their occupation of the country's main international airport.

Credit investors fear more political instability and possible violence after a court banned Thai Prime Minister Somchai Wongsawat from politics for five years and disbanded his party. [ID:nWLA2716]

Concerns over credit ratings downgrades and even defaults in Asia's corporate sector could also dominate in the short-term, keeping spreads from tightening too much, traders said.

Bonds backed by Malaysian palm oil producer IOI Corp <IOIB.KL> and Indonesian mobile operator PT Mobile-8 Telecom Tbk <FREN.JK> remained under pressure after both were downgraded by credit rating agencies on Tuesday.

"It is difficult to see the rally in equities being sustained and it will not take much in the way of more bad economic news to bring a dose of reality back.," Calyon analysts said in a note to clients on Wednesday.

The Asia ex-Japan iTRAXX investment-grade index <0#ITAIGMPBMK=> tightened by 15-20 basis points to 405, erasing most of the sharp widening seen on Tuesday.

The moves came after gains in global stock markets and ahead of expected interest rate cuts by policymakers from the euro zone to New Zealand at meetings this week.

Regional credit spreads have outperformed their European and U.S. counterparts, which have been hitting new record highs -- levels that in Asia were breached in late October.

THAILAND RISK

Political risks are on the rise in Asia. Thailand's 5-year CDS <THGV5YUSAC=GF> widened by 5-10 bps to 350, as concerns continue to mount, especially after both Standard & Poor's and Fitch cut their outlooks on the country on Monday.

Elsewhere, sovereign spreads moved in. South Korea's five-year CDS <KOREA5UA=GFI> tightened by 5-10 basis points to 370. Although the country said foreign exchange reserves fell to their lowest in almost four years, the remaining $200.5 billion are still seen as hefty, traders said. [ID:nSEO43498]

The Asian cash bond market remains little traded as investors focus on protection.

Bonds maturing in 2015 from a subsidiary of IOI Corp <MY021237086=> were trading at around 60 cents to the dollar after Moody's cut the Malaysian planter by one notch to Baa1, or the third-lowest investment grade level. [ID:nWLA2727]

Moody's cited IOI's reduced liquidity and increasing debt levels on the back of what it called "substantial" share repurchases and "hefty" capital distributions. The move comes after Fitch had cut IOI ratings by the same amount on Nov. 28.

Meanwhile, the thinly-traded 2013 bonds for Indonesia's Mobile-8 <XS0313108143=R>, with only $100 million issued, had a last quote in November of 18 cents to the dollar.

S&P cut its ratings on the mobile operator to D from CC, meaning it considers it to be at or near default, citing doubt about whether it can afford a required repurchase of its outstanding bonds by the middle of December. [ID:nWLA2716]

FIVE-YEAR CREDIT DEFAULT SWAPS

Bid/Ask spread

Current Week ago Korea Dev Bank 480/~ /505 Hutchison ~/450 340/~ PCCW-HKT 400/600 420/~ China 190/240 155/200 Indonesia 770/~ ~/870 Korea 370/~ ~/400 Malaysia 270/320 260/300 Philippines 425/~ 410/460 ~ no bid or ask spread For CDS prices double click on <GFICDS>

ASIAN BENCHMARK DOLLAR BONDS

Coupon Maturity Bid price Bid spread

5-YEAR

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DBS Bank 7.13 15-May-11 100.77 512

Malaysia 7.50 15-Jul-11 106.13 331

ICICI Bank 5.75 12-Jan-12 75.00 146

Petronas 7.00 22-May-12 103.04 436

Hutchison 6.50 13-Feb-13 96.02 596

Chartered Semi 6.25 4-Apr-13 79.83 107

Korea 4.25 1-Jun-13 93.65 422

United Overseas 4.50 2-Jul-13 89.00 571