02 Dec 2008
Dec. 2 (Bloomberg) -- The cost of protecting Asia-Pacific bonds from default rose on speculation central banks are reaching the limit of what they can do to ease the severity of the global economic recession.Australia's central bank cut its benchmark interest rate today, extending the biggest round of reductions since a 1991 recession, as it tries to boost consumer confidence amid the biggest drop in house prices since 1978. Japan's benchmark of credit-default swaps rose the most in more than a week before Bank of Japan Governor Masaaki Shirakawa briefs the press on the results of an emergency meeting today.
``The economic slump is too hard for anyone to fix right away,'' said Tetsushi Nagato of Schroder Investment Management Japan Ltd., whose parent manages the equivalent of $204.5 billion. ``The BOJ is likely to implement quantitative easing again, maybe next year. It will be like a global quantitative easing.'`
The Markit iTraxx Japan index of credit-default swaps rose 25 basis points to 360 as of 11:30 a.m. in Tokyo, according to Credit Suisse Group AG. The iTraxx Australia index advanced 35 basis points to 375 in Sydney, Citigroup Inc. prices show.
Quantitative easing refers to the period between 2001 and 2006 when Japan's central bank kept interest rates close to zero and flooded the financial system with cash. The U.S. Federal Reserve has effectively adopted a similar policy already, Kazumasa Iwata, former deputy governor of the Bank of Japan, said in a speech on Nov. 26.
Fighting the Recession
The U.S. central bank may start purchases of Treasuries and target long-term interest rates to combat the deepening recession, Fed Chairman Ben S. Bernanke said yesterday. The manufacturing sector of the world's biggest economy contracted last month at the steepest rate in 26 years.
``There's been a lot of weak data and Bernanke's comments put us more and more into negative territory,'' said Brayan Lai, a credit analyst at Calyon in Hong Kong. ``The outlook has gotten worse and we recommend investors remain cautious.''
The Institute for Supply Management's factory index dropped to 36.2, below economists' forecasts, and its gauge of raw- material costs plunged to the least in six decades, intensifying concern over deflation. The U.S. economy ``will probably remain weak for a time'' even if the credit crisis eases, Bernanke said in a speech yesterday.
Japan's Consumer Lenders
Non-bank lenders and real-estate companies are among those facing the most financing difficulty as credit markets seize up and investors become more reluctant to invest in riskier assets, said Nagato, a credit analyst at Schroder in Tokyo.
Three-year credit-default swaps on Acom Co., Japan's largest consumer lender by market value, traded 130 basis points higher at 860, according to Credit Suisse data. The price to protect against an Acom default is equivalent to 860,000 yen ($9,180) annually per 10 million yen of bonds.
``The price movements are so rapid,'' Nagato said. ``It's ugly, a small portion of the market can determine the price.'`
Corporate bond sales in Japan plunged 45 percent in November from a year ago, data compiled by Bloomberg show. NTT DoCoMo Inc. and Nippon Steel Corp. paid higher yield premiums last week when they sold the first bonds outside the public works sector since Oct. 15. The shortage of credit drove bankruptcies among publicly traded companies to a record 30 this year, after property developer Morimoto Co. collapsed last week.
Asia's Default Risk
The Markit iTraxx Asia credit-default swap index of 50 investment-grade borrowers outside Japan, including Thailand and Hutchison Whampoa Ltd., advanced 35 basis points to 425 at 10:06 a.m. in Hong Kong, according to ICAP Plc prices.
Contracts on South Korean government debt widened 30 basis points to 415 and those on Thailand's debt increased 20 basis points to 345, according to BNP Paribas SA data.
Thailand's rating outlook was downgraded to ``negative'` at Fitch Ratings and Standard & Poor's yesterday after political protests led to a week-long shutdown of Bangkok's international airport and sporadic violence.
The indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to debt agreements.
A basis point, or 0.01 percentage point, is worth $1,000 on a swap protecting $10 million of debt.
