Emerging debt-Asia bonds spreads widen; inflation fears weigh

HONG KONG, June 27 (Reuters) - Asian sovereign and corporate bond spreads widened significantly on Friday amid a deteriorating outlook for the global financial sector and after oil prices surged to a record, cementing concerns over inflation.

The iTRAXX Asia ex-Japan high-yield index ITAHY5UA=GFI, a key measure of risk aversion, widened by 20-25 basis points (bps) to 560/566, the highest since mid-April. The investment-grade index ITAHY5UA=GFI widened by 10 bps to 155/165.

"Everything got wider today, given the financial and oil concerns. The market is going to be very bad for a while, and I doubt that it's going to get any better in the U.S. and European markets later today," said a Hong Kong-based trader.

Worries over the global financial sector are gaining force after analysts warned this week of mounting losses, including for Citigroup (C.N) and Merrill Lynch MER.N, two financial institutions that have been hit hard by a credit crisis that started last year. [ID:nBNG32979] and [ID:nBNG71924]

The pain is also being felt in Europe. Belgian-Dutch financial services group Fortis (FOR.AS) (FOR.BR) said on Thursday it would sell new shares and pay no interim dividend to shore up its finances. [ID:nL26184927]

The renewed worries over the financial sector come as investors already grapple with the prospect of surging inflation at a time of a slowing global economy.

Oil prices surged nearly 4 percent to a record of $140.39 a barrel on Thursday, though they pulled back on Friday with U.S. crude futures CLc1 down 70 cents at $138.94 as of 0308 GMT.

INFLATION WOES

Countries in the region are responding to the inflation threat by raising interest rates and intervening to prop up currencies that are weakening as surging oil and raw material costs worsen trade and fiscal balances.

Vietnam has been particularly hit. Though it has seen annual inflation accelerate to 26.8 percent in June, it doubled the trading band for its dong on Thursday, yielding to market pressure for currency depreciation due to its widening trade deficit. [ID:nSP18557]

The country's five-year credit default swaps (CDS) VIETNA5UA=GFI widened by 25 basis points to 325/355.

The cost of protection against Vietnam's debt had surged to a record 350 in early June before falling to as low as 310 on Thursday, with traders attributing the tightening to technical factors as well as the government's tough talk on inflation.

Other countries saw their CDS widen as well on Friday, with Indonesia INDONE5UA=GFI widening by about 20 basis points to 275/285 and the Philipines PHILP5UA=GFI moving out by about the same amount to around 260 basis points.

'SUICIDAL' PRIMARY MARKETS?

Global markets have weakened throughout this month, though that has not deterred Asian issuers from selling debt given that spreads still remain well below the record highs seen at the height of the global credit crisis in mid-March.

But the sudden falls in markets on Thursday made bankers wary whether the new debt sales will continue after deals this week from India's Vedanta Resources (VED.L) and South Korea's GS Caltex.