Benchmark bonds battered in Asia

Benchmark bonds battered in Asia

HONG KONG (Dow Jones): Asian benchmark bonds have taken a big hit over the last week, with U.S. interest rate fears, falling stock markets, and renewed Latin American volatility coming together to roil bond markets around the world.

In the past week, the spreads on Asian investment-grade bonds over U.S. Treasurys widened by 20 to 75 basis points, while Indonesian sovereign paper was bid 200 basis points wider.

The Korea 2008 is quoted at 260 basis points over U.S. Treasurys, compared to 225 a week ago; while the Thailand 2007 is quoted at 220 basis points against 190 basis points last week.

But bids on benchmarks came in slightly amid very thin trade Tuesday in New York, producing mid-prices which are marginally narrower from the previous day, according to some market participants. Other traders, however, attributed the inward moves to a sense that the Asian benchmarks are a bit oversold.

Meanwhile, the market is cautiously awaiting the Malaysian global bond deal, traders said.

"With spreads widening customers are on hold," said the head of bond trading at a European bank. "They don't want to commit until they see how this (Malaysian) bond is distributed."

The proxy-sovereign Petronas 2006, on which the Malaysia issue is likely to be priced, has seen its spread widen to 320 basis points compared with 280 basis points from a week-ago Wednesday.

"If Malaysia doesn't go so well, definitely there'll be some widening," said the trader. "Malaysia is kind of a proving ground for anything that's on the borderline (between investment grade and junk)....The Philippines definitely would face a little bit more trouble."

Malaysia is currently ranked just over the border in investment-grade territory, while the Philippines is one notch below in speculative territory.

While rumors continue to circulate the Malaysia deal may be scuttled altogether, others say the issue could be priced as early as later Wednesday in New York.

Salomon Smith Barney, the sole lead manager, is providing very little information on the deal given the volatile market conditions, leaving many market participants to complain they're completely in the dark about timing and pricing.

According to the head of bond trading with another European bank, the deal may go forward at only US$1 billion - half the expected size - with a 10-year maturity at 335 to 325 basis points over U.S. Treasurys.