Asia’s Junk Bond Premium Surges to 2011 High on Fed Exit Outlook

The premium on junk-rated dollar-denominated debt in Asia over investment-grade notes jumped to the highest since 2011 as regional bond risk surged after the Federal Reserve signaled stimulus cuts.

Investors demanded 433 basis points more to hold riskier notes instead of higher-rated securities as of yesterday, the most since October 2011, according to Bank of America Merrill Lynch data. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan is set for its biggest weekly increase since September 2011.

Investors are accelerating a sell-off of risky assets after Fed Chairman Ben S. Bernanke said bond buying that fueled gains in markets around the world may be trimmed this year if risks to the U.S. economy continue to decrease. Average yields on Asian junk notes in dollars rose 45 basis points yesterday to 7.93 percent, the highest since October 2011.

“A lot of the high-yield issues we’ve seen over the past five months from January to May have been hit the hardest,” said Brayan Lai, a Singapore-based analyst in emerging-market credit trading at Jefferies Group LLC. “Technically it’s going to be weak for a while.”

Asia’s non-investment grade notes lost 3.4 percent this month as of yesterday, set for the worst performance since September 2011, according to the Merrill Lynch index. High-yield, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

Asian Risk

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan gained 5 basis points to 166 basis points as of 8:21 a.m. in Singapore, according to Royal Bank of Scotland Group Plc prices. The benchmark is on course for its biggest weekly increase since the period ended on Sept. 23, 2011, according to data provider CMA.

The Markit iTraxx Australia index jumped 10 basis points to 147.5 as of 10:23 a.m. in Sydney, according to National Australia Bank Ltd. prices. The measure is on track for its highest close since Nov. 16, after jumping 15.2 basis points yesterday. That was the sharpest rise since March 20, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Japan index increased 8 basis points to 123.5 as of 9:22 a.m. in Tokyo, Citigroup Inc. prices show. The gauge is set for its biggest daily advance since June 13 and for its highest close since March, CMA prices show.

Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

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