Asian bond spreads narrow on US economic hopes

Asian bond spreads narrowed on Thursday as the United States moved closer to implementing an $825 billion economic package and adopted more measures to lift the economy and stabilise the financial markets. The US House of Representatives on Wednesday approved the passage of the economic stimulus bill that is expected to reverse the nation's worsening unemployment situation and increase spending on roads and other infrastructure.
The creation of a US government bank that would absorb toxic assets and the Federal Reserve's decision to buy long-term Treasuries, while keeping its key rates steady at near zero, also lifted sentiment. "Financial markets are having a relief rally. Risk appetite is improving and it is reflected in Asian credits," said Tim Condon, chief economist at ING Financial Markets in Singapore.
The Asia iTRAXX investment-grade index excluding Japan, a key measure of risk aversion, narrowed by up to 20 basis points to 315, the lowest level in two weeks, Hong Kong-based traders said. Spreads may continue to tighten as inflation in the United States, Europe and Asia are expected to slow further due to the sluggish global economy, Condon said. "An environment of lower inflation is good for the continued compression of credit spreads," said Condon.
Elsewhere, Indonesia's five-year credit default swap (CDS)- or insurance-like contracts that protect investors against defaults or restructuring - widened 10 basis points to 610 on talk the country would soon issue global bonds to fund a bigger budget deficit this year. Jakarta is eyeing a higher deficit of 2.5 percent of GDP against the previous forecast of 1 percent as it intends to spend more to spur the economy.
Indonesia plans to withdraw only half of the $5.5 billion in standby loans committed by official creditors such as the World Bank in an effort to lower the government's debt ratios further. Meanwhile, the Philippines' five-year CDS was 10 basis points tighter at 390, a trader said. Manila said on Thursday that the economy expanded by a better-than-forecast 1.0 percent in the fourth quarter, on a seasonally adjusted basis, from the previous three months.