Asian bond spreads tightened significantly on Monday after the United States proposed rescue measures for beleaguered US mortgage lenders Fannie Mae and Freddie Mac, but caution remained about the fragility of debt markets.
Traders said lingering doubts about the capital-raising abilities of both firms, which are central to the functioning of the US housing market, as well as continued concern about the US financial sector would keep any rally in check. Even so, a key measure of risk aversion in the region, the iTRAXX Asia ex-Japan high-yield index, tightened by 15 basis points (bps) to 535/545.
That was below the 580 hit in early July and well under the record above 650 hit before the rescue of Bear Stearns in March, when investors had similarly fretted about threats to the global financial system. "I don't think this Fannie Mae/Freddie Mac issue is going to get resolved with any simple solution. The reality check will come back later again," said Dilip Shahani, a credit analyst at HSBC in Hong Kong.
The US Federal Reserve sought to calm markets by offering Fannie and Freddie access to emergency cash. The US Treasury offered to boost its line of credit to the two US mortgage firms and said it would buy equity in them if needed. One trader said investors were waiting for the reaction to these weekend developments from European and US markets.
"It's hard to conclude that these steps will completely resolve the situation. In the medium term, sentiment is still very fragile," said the Hong Kong-based trader. Philippine cash bonds, among the most widely traded in the region excluding Japan, rose about half a point each. Bonds due in 2031 were quoted at 105.75/106, while its 2032 bonds were at 92.75/93.
Manila's five-year credit default swaps, insurance-like contracts that protect investors against default or restructuring, tightened by around 10 basis points to 260. Even before the panic over the US mortgage lenders, investors had pushed Asian spreads wider recently due to concern about the global economy and surging inflation. The volatility seen this month has derailed Asian issuers' plans to sell new debt. Woori Bank, part of South Korea's Woori Finance Holdings, said last week it would put on hold a plan to sell new dollar bonds in an issue thought to be worth $500 million.