Asian bonds were slightly higher on Tuesday ahead of an expected rate cut by the US Federal Reserve, but the optimism was offset by a view the US central bank could signal an end to the current easing cycle. Activity was also spurred by two major US corporate deals and a continued revival in US primary markets which signalled a pick-up in risk appetite.
The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, moved in to 423/428 basis points from Monday's close of 435/441 bps. "Equity markets continue to stabilise, we have seen some real money accounts buying. Some of them are coming back trying to pick up beaten down bonds," said a Hong Kong based trader.
Overnight in the United States, Mars Inc, the maker of M&Ms candy, offered to buy Wm Wrigley Jr Co, the world's largest chewing gum maker and Kirk Kerkorian's Tracinda Corp said it intends to make a cash tender offer for up to 20 million shares of Ford Motor Co. Also on Monday, Bristol-Myers Squibb brought a $600 million bond deal to the market and a finance unit of Ford Motor Co sold $1.1 billion in debt.
"M&A activity is growing in the US, the high-yield market is also picking up. All this put together shows a better risk environment," said Dilip Parameswaran, credit analyst with Calyon Corporate & Investment Bank. Philippines bonds edged up despite a warning by Philippine President Gloria Macapagal Arroyo that her government was reconsidering its long promised target of a balanced budget.
"A small deficit or surplus will not have a significant impact. The market is already expecting this," a Manila-based trader said, adding that bond prices already reflected this expectation. Philippine 2031 bonds were a quarter point higher at 112.75/113.25 cents to a dollar. Its 5-year credit default swaps - insurance-like contracts that protect against defaults and restructuring - moved in to 179/184 bps from 184/189 bps.