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Asian spreads tighten as govts react to crisis

Published: 10 Nov 2008 01:54:26 PST

HONG KONG, Nov 10 - Asian bond spreads tightened on Monday amid hopes government measures from Seoul to Beijing to counter the impact of the global financial crisis would reduce the potential for a global recession.

China approved on Sunday a 4 trillion yuan ($586 million) government spending package to boost domestic demand, raising hopes that Asian exports to the world's fourth-largest economy will not fall as much as some had feared.

Governments in the region are also responding by cutting interest rates, including South Korea on Friday and Taiwan on Sunday. Meanwhile, the Philippines cut bank reserve requirements late on Friday.

"In addition to further fiscal stimulus, pressure for further monetary easing will remain intense. Central bank rhetoric is becoming increasingly dovish and many are now openly discussing the fact that their respective economies are in recession," said Calyon in a note to clients on Monday.

The Asia ex-Japan iTRAXX investment-grade index, a key measure of risk aversion, tightened about 20 basis points to 320, a level that is around half of a record at just under 650 bps hit in late October.

Emerging markets remain vulnerable to the slowdown in larger economies such as the United States and the euro-zone, given the expected hit on exports as well as the difficulty in raising short-term funds in overseas markets, among other reasons.

Fitch cut its ratings outlook on Malaysia and South Korea, as part of a group of negative actions among emerging markets on Monday though investors shrugged off the report, with debt spreads tightening in both countries.

South Korea's five-year credit default swaps (CDS), or insurance-like contracts that protect against defaults, tightened to as much as 255 basis points, significantly below the 330 at which it was trading early on Friday in Asia.

South Korea cut interest rates for the third time in a month on Friday, and analyts predicted further reductions in coming months.

Malaysia's five-year CDS tightened to 185 basis points, compared to 225 bps on Friday.

Fitch cut its outlook on the Southeast Asian economy's rating to stable from positive, citing the impact on its balance of payments from lower prices for oil and other commodity exports.

Philippines' five-year CDS was trading at 320, down from 385 early on Friday in Asia after the country's central bank unexpectedly cut bank reserve requirements by 2 percentage points late on Friday.

But China tightened only about 10 basis points to 120, despite its stimulus package, because the country never experienced the sharp widening seen in other sovereign debt spreads in the region, traders said.

FIVE-YEAR CREDIT DEFAULT SWAPS

Bid/Ask spread

Current Week ago Korea Dev Bank 382/~ 490/~ Hutchison 260/~ 425/~ PCCW-HKT 400/650 750/~ China ~/170 ~/170 Indonesia ~/650 ~/655 Korea 225/320 ~/400 Malaysia ~/220 ~/270 Philippines 320/~ ~/465 ~ no bid or ask spread ASIAN BENCHMARK DOLLAR BONDS

Coupon Maturity Bid price Bid spread

5-YEAR

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DBS Bank 7.13 15-May-11 93.01 775

Malaysia 7.50 15-Jul-11 104.44 310

ICICI Bank 5.75 12-Jan-12 68.93 166

Petronas 7.00 22-May-12 96.74 548

Hutchison 6.50 13-Feb-13 84.84 845

Chartered Semi 6.25 4-Apr-13 88.75 683

Korea 4.25 1-Jun-13 89.36 442

United Overseas 4.50 2-Jul-13 80.84 712

PCCW-HKT 6.00 15-Jul-13 101.18 314