Dollar Debt in Asia at Risk of More Falls After Fed, Nomura Says

Dollar-denominated bonds in Asia have room to drop further, Nomura Holdings Inc. said, after Federal Reserve Chairman Ben S. Bernanke discussed the prospect of phasing out unprecedented stimulus. The cost of protecting Asian debt against default rose to a 10-month high.

Increasing losses in emerging markets combined with a worsening economic outlook for the region may prompt institutional investors to pull money out, spurring an additional widening of credit spreads for U.S. currency debt in Asia, said Nomura analyst Pradeep Mohinani.

Stocks around the world slumped and Treasury yields touched a 15-month high after Bernanke said the Fed may start tapering its unprecedented stimulus this year and halt bond purchases around mid-2014 as long as the U.S. economy performs as forecast. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan soared 19 basis points to 159 earlier, headed for its highest close since Aug. 2, prices from Australia & New Zealand Banking Group Ltd. and CMA show.

“It’s certainly not a buying opportunity at the moment,” said Mohinani, who heads Nomura’s corporate credit analysis for Asia excluding Japan. “We already thought it was going to be a tough second half and what’s happened in the past week tells us that there are certain areas you just want to stay away from. We still haven’t reached the wide levels that we could get to in a number of sectors.”

CDS Surge

Gauges for bond risk in Australia and Japan also rose.

The Markit iTraxx Australia index jumped 13.5 basis points to 141 as of 10:34 a.m. in Sydney, according to Citigroup Inc. prices. The measure is on track for its sharpest rise since March 20 and to close at the highest level since Nov. 19, prices from data provider CMA show.

The Markit iTraxx Japan index increased 7.5 basis points to 116 as of 9:28 a.m. in Tokyo, according to Citigroup. The gauge is poised to close at the highest since March 5, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

While citing waning risks to the U.S. economy, Bernanke said curbs to the Fed’s bond buying hinge on gains in the labor market and a pickup in growth.

Treasuries slid for a fourth day, with 10-year yields touching 2.38 percent, the highest level since March 21, 2012.

Weaker Growth

In contrast to the U.S., the prospects for many less developed economies in Asia and elsewhere have dimmed. Manufacturing in China, the world’s second-biggest economy, is shrinking at a faster pace this month. The preliminary reading of 48.3 for a Purchasing Managers’ Index released today by HSBC and Markit Economics follows May’s final reading of 49.2, which was the first below 50 since October, indicating contraction.

“The attractiveness of emerging markets has diminished because of lower economic growth expectations,” said Krishna Hegde, head of Asia credit research at Barclays Plc. “Across the board -- be it for China, Brazil or Indonesia -- growth expectations have come down, and that means on a relative basis emerging markets are less attractive than they were compared to developed economies.”

The uncertainty surrounding the Fed’s stimulus program has contributed to a drought in new dollar-bond sales in Asia. Issuance is “likely to remain very low for some time,” according to Mohinani.

KCC Corp., a South Korean manufacturer of paint products, was the last company from Asia outside of Japan to sell dollar bonds, raising $269 million on June 18, according to data compiled by Bloomberg. The previous sale was a $400 million issue by China Huaneng Group Corp. on June 4.

A lack of liquidity in the market is also making it difficult for investors, according to Barclays’ Hegde.

“It’s hard to say exactly what the market level for many Asian dollar bonds is at the moment,” he said. “Investors should wait and see, because we still need to see that initial wave of selling go through. We’re likely to see more clarity on the clearing levels within a few days.”

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