Credit gauges in Asia show the most concern since early in the pandemic

CREDIT DEFAULT SWAPS (CDS) in Asia blew out the most since the worsening of the coronavirus disease 2019 (COVID-19) pandemic in 2020, as a rout in risk assets deepened following US President Donald J. Trump’s doubling down on his global tariff barrage and China’s retaliation.

The cost to insure investment-grade debt of Asian issuers outside Japan widened by 26.5 basis points (bps) on Monday, according to traders, deeper than the 22 bps in earlier trading. If that level holds, it would mark the biggest single-day jump since March 2020, a Markit index shows.

The moves in credit mirror a sell-off in stocks around the region Monday, with equity gauges from Sydney to Tokyo plunging. The new US tariffs last week also caused global junk bond spreads to widen by the most since 2020 as investors worried that the levies would set off a wave of defaults and push economies, including the US, into recession.

At the open in Europe, gauges for credit risk climbed further from their blowout last week to their highest since late 2023. The Markit iTraxx main index of European investment-grade borrowers rose by 9.25 bps to 86.1 bps. The iTraxx Crossover index — which tracks CDS of European junk debt issuers — rose by another 46.3 bps to 433.2 bps.

“The sell-off is driven by fears of recessions,” said Pauline Chrystal, a fund manager at Kapstream Capital in Sydney. “We still see the sell-off as an opportunity to add risk. However, prolonged uncertainty resulting in lower capex from corporates, significant impact on earnings or a rise in unemployment may change our view.”

US officials have levers they can pull to “rectify” the situation, including walking back some of the tariffs if markets sell off further, or the possibility of Federal Reserve intervention, she said.

Spreads on Asian high-grade bonds widened at least 15 bps on Monday, according to traders, worsening from a minimum 10-bp blowout earlier. That would be the worst widening also since March 2020 if the benchmark closes at that level, a Bloomberg index shows. Hong Kong and Chinese borrowers are among the names leading losses, as the markets there try to catch up after a holiday on Friday, according to traders.

Yield premiums on both investment-grade and junk debt from Asia fared better than US peers last week. Junk bond spreads in the US widened by 93 bps in the two-day period to Friday, more than double that of comparable Asian debt, Bloomberg indexes show.

In broader debt markets, yields on two-year Treasuries, the most policy-sensitive bonds, dropped as much as 22 bps, while the Japanese yen and Swiss franc surged as funds poured into havens.

Still, spreads globally are rising from some of the lowest in decades, and their levels still remain below the highs touched when Silicon Valley Bank failed in March 2023.

“This is an economic stagflationary shock and likely to morph into a structural change if tariffs remain in their current form,” Omar Slim, co-head of Asia fixed income at PineBridge Investments, said. “Credit markets are definitely not insulated, but they tend to respond violently whenever there is a financial shock, which isn’t the case here, at least so far.”

Bond issuers are somewhat shielded from the current upheaval, as balance sheets remain generally healthy, he said.

Mr. Trump, speaking Sunday on Air Force One, dismissed investors’ fears and repeatedly defended the tariff move unveiled last week. He also said he wouldn’t strike deals to cut the highest tariffs unless they’d eliminate the US trade deficit with that country.

Given the backdrop, strategists are bracing for spreads to widen in the short-term. Risks were skewed for investors to demand even higher risk premiums, Goldman Sachs Group, Inc. credit strategists led by Lotfi Karoui wrote in a Sunday note.

Henry Loh, head of Asia credit at Aberdeen, echoed the view. “With global credit spreads having traded through historical averages, there’s a lot of room for spreads to move wider,” he said. “The sell-off thus far has been indiscriminate, and while a more cautious near-term approach may be prudent, we expect Asia’s resilience to play out in the longer term.” — Bloomberg