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Emerging Debt-Asian bond spreads widen, but outlook firm

HONG KONG: Asian benchmark dollar bond spreads were slightly wider on Monday, but drew comfort from the stabilisation of US interest rate swap spreads to start the second quarter with a firmer outlook, market sources said.

Widening swap spreads were a factor pushing Asian benchmark spreads out against US Treasuries last week.

By the end of the March quarter average Asian sovereign bond spreads had widened to around 202 basis points above comparable Treasuries, their widest level since late November, according to Merrill Lynch analysts.

But while the movement in swaps had pushed Asia wider, in relative terms the Asian spread premium over swaps was at a two year tight level, implying underlying firmness in Asia sovereign debt, Merrill said in its March fixed income strategy report.

ASIA CREDIT OUTLOOK GOOD

A benign interest rate environment, expectations of falling oil prices, a rise in credit allocations by major international banks to Asian issues and possible ratings upgrades set a positive tone for Asian debt markets in the second quarter.

"Despite the weakness of the first quarter, we believe that the outlook for the second quarter is fairly sanguine," Raja Visweswaran, head of Asia securities research at Bank of America, said in a note to clients.

Ratings upgrades are possible in South Korea, Malaysia and Thailand in coming months and would add to the growing evidence that credit conditions are improving steadily around the region.

Moody's Investors Service said in a statement on Monday it would review Thailand for a possible upgrade.

The ratings agency said the review was prompted by Thailand's improved external performance, strong external liquidity position and broadening economic recovery.

"These factors, together with ongoing institutional reforms, appear to have enhanced the stability of the financial sector and facilitated corporate sector restructuring, although the overall pace of the latter remains slow," the statement said.

Moody's is the only credit rating agency that has yet to raise its sub-investment rating for the country.

Moody's now rates Thailand Bal one notch below investment grade but has a positive outlook for the country, meaning the rating's next move is likely to be upwards.

POLITICAL RISK POUNDS PHILIPPINES

Political risk loomed large in the Philippines debt market on Monday after weekend rumours President Joseph Estrada would be ousted in a coup by a right-wing military faction.

Military generals dismissed the rumours and reports of them in domestic newspapers as baseless.

Market players were also dismissive, but stuck to the sidelines nevertheless.

"We do not see the possibility of a coup as anything more than a gimmick at this stage, but the frequent repetition of this rumour. shows that politics continues to occupy centre stage in the Philippine economy," Visweswaran said.

The benchmark Philippines 8.875 percent sovereign bond due in 2008 was trading at a spread of about 381 basis points over comparable US Treasuries on Monday.

It was trading at about T+293 basis points in December and analysts say the issue is oversold.

INDONESIA MOVES ON BANK RECAPITALISATION

Indonesia is racing to fulfill pledges to the International Monetary Fund in an effort to persuade creditors to reschedule its debt and the IMF to release its next loan instalment.

Indonesia's Finance Ministry said on Monday the government would issue the first tranche of recapitalisation bonds for state bank by the end of the week.

According to a letter from the IMF to the government obtained by Reuters, Indonesia has been asked to bring forward the deadline to issue the first tranche of BNI's recapitalisation bond to April 8 from April 12.-Reuters