Asian bond spreads tightened on Friday after a newspaper reported the US government could take over mortgage giants Fannie Mae and Freddie Mac and after US policy makers restated their commitment to stabilising financial markets. The New York Times report, citing people briefed on the plan, said the government was considering taking over one or both of the lenders if their problems worsened.
That helped Asian bonds because investors had been worried the lenders would be unable to raise new capital in their current condition, stoking fears they could default on their existing debt, which would have had repercussions throughout debt markets.
Even so, the mood remained cautious, especially as a rebound in oil prices added to concern about inflation in Asia. "Markets are clearly very volatile, up one day, down the next. So, given the reduced liquidity in the summer, and US financial results coming up next week, everyone is taking a wait-and-see attitude," said a syndicate investment banker for a major foreign lender in Hong Kong.
The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, tightened by 5 basis points (bps) to 565/569, while the investment grade benchmark narrowed by 2 bps to 162/166 bps.
Although spreads for the week are now roughly flat, trading has been very volatile, with spreads experiencing dramatic moves amid renewed worries over the global credit crisis and big swings in the price of oil.
SM Investments was a rare example of a completed deal, pricing a $350 million, five-year bond on Thursday at a yield of 6.75 percent, in line with guidance and the equivalent of 305.7 basis points over midswaps.
The bonds from the Philippine conglomerate were unchanged on Friday. J.P. Morgan Chase and Merrill Lynch are among US financial firms to post quarterly earnings next week. Bonds in Asia were also helped by a rise in US stocks after Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told lawmakers they were working to stabilise the financial markets and improve oversight.
But investors remained concerned over signs of slowing economic growth in Asia at a time of surging inflation. The Philippines' five-year credit default swaps, insurance-like contracts that protect investors against default or restructuring, tightened by around 10 basis points to 270.