Asian bond risk surges to 2-month high on concerns of contagion from US junk-bond market

SYDNEY (BLOOMBERG) - Asian bond risk surged to a two-month high after Third Avenue Management's decision to freeze redemptions at a high-yield US credit fund underscored concern about reduced market liquidity and a potential exodus of investors.

The cost of protecting debt against non-payment has risen across the Asia-Pacific region amid anxiety that recent losses in US junk bonds have further to run and could spread to other regions.

Debt of struggling companies has been hard hit as declining energy and commodity prices weigh on the prospects for producers just as the Fed is preparing to raise borrowing costs for the first time in almost a decade.

The Markit iTraxx Asia index of credit-default swaps rose 5 basis points to 147 basis points as of 9:33 am in Hong Kong, Australia & New Zealand Banking Group Ltd. prices show. That's on track for its highest close since Oct 8, according to data provider CMA.

A global bout of risk aversion also prompted a drop in Asian stocks and further deterioration in commodity markets, particularly oil. Third Avenue Management said last week it was liquidating a US$788 million credit mutual fund, and Stone Lion Capital Partners suspended redemptions in its US$400 million US high-yield fund, just days before US policy makers meet to decide whether to implement a long-anticipated increase in Federal Reserve interest rates. Investors including Jeffrey Gundlach, Carl Icahn and Bill Gross have warned there could be worse to come for high-yield debt.

"Spreads widened on both investment-grade and junk bonds in Asia today because of a combination of factors, including the equity selloff in the US on Friday, the upcoming potential Fed rate hike, the news on frozen redemption in some US funds and the crude price dive," said Ross Lee, a credit analyst at Bank of China Hong Kong.

Measures of risk for both Australia and Japan have also risen to levels unseen in more than two months. The Japan iTraxx increased 5.5 basis points to 79.25, Citigroup pricing showed as of 10:31 am in Tokyo. The Australia iTraxx gauge was up 7 basis points to 134 as of 12:55 pm in Sydney, based on National Australia Bank prices. It was last higher on Oct 2.