Asian bond spreads widen

Asian bond spreads widened on Tuesday as worries mounted about the health of US financial institutions despite assurances from the government that it is ready to prop up ailing banks. Wall Street stocks slumped to a 12-year low on Monday as investors doubted that Washington will be able to stabilise the financial sector. Fears that some major US banks such as Citigroup could be nationalised also triggered the selloff.
Asian euphoria over a report on Monday that the US government may end up holding as much as a 40 percent stake in Citigroup quickly dissipated overnight, overcome by worries the move may not be enough to reverse its losses. "Any initial positive sentiment from the Citigroup report disappeared very quickly," a Hong Kong-based credit analyst said. "People think the problems of US financial institutions are not over yet. There will be more writedowns."
The Asia iTraxx investment-grade index excluding Japan, a key measure of risk aversion, widened by 10 basis points to 435/450, traders said. "In the next week or so, spreads will continue to widen until these issues are at resolved," a trader said. South Korea's five-year CDS were trading 10 basis points wider at 435/445, as investors remained wary about its ability to pay foreign debt even after repeated assurances from the government that it had enough currency reserves to meet maturing overseas obligations.
The country's top financial authorities plan to meet on Tuesday to discuss foreign exchange rates and other economic issues, Yonhap news agency reported. The meeting came as the won continued to slide versus the US dollar. "Over the short-term, the sensitivity of Korean spreads will be linked to the won," the credit analyst said. "The supply of dollars remains an issue."
Indonesia's five-year CDS widened 20 basis points to 650/670, in line with the broader market. The government will go ahead with plans to sell global bonds, the finance ministry said. Malaysia's five-year CDS also widened 5 basis points to 305, on worries the government's budget deficit may go up this year as it plans to raise spending to spur the economy.
The central bank is meeting on Tuesday to decide on interest rates. Economists in a Reuters poll were split on whether rates would be cut further or put on hold. In cash bond trading, interest in Asia Aluminium Holdings debt remained thin amid uncertainty about plans by Asia's biggest producer of extruded aluminium to buy back its debt, a trader said. The company's bonds due in 2011 were quoted at 11/24 cents on the dollar, a trader said, from 15/19 on Monday.