Risk premiums in Asian bonds fell on Monday after a bailout of US auto makers eased concerns about the impact of their potential bankruptcies on the global credit market. However, spreads in the region remain elevated given the weak outlook for growth in the region.
Adding to the gloom, Japan said on Monday exports plunged at a record annual pace in November, with shipments to Asia dropping most the most since 1986. The data comes after the Bank of Japan cut its key policy rate close to zero on Friday and moved to pump funds into the market to ease a corporate credit crunch.
Asian offshore debt markets are expected to remain range-bound until the end of the year, with little trading seen as many investors have already departed for the holidays. "We are seeing tighter spreads thanks to the US bailout, but not by much," said a Hong Kong-based dealer. "It's very quiet right now, and it's going to remain like this 'til the end of the year."
The Asia iTRAXX investment-grade index excluding Japan, a key measure of risk aversion, narrowed by about 5 basis points (bps) to 350. That still remains more than a five-fold increase for the year. Spreads narrowed after President George W. Bush bailed out US automakers on Friday with $17.4 billion in emergency loans, potentially staving off collapses in the sector.
However, how the rescue will affect bondholders of US auto makers remains uncertain, with analysts predicting it may spark payments in the credit default swaps (CDS) market, given that the US loans will now be senior to any existing debt.
CDS provide investors with protection against a default or restructruring. Other uncertainties remain. Standard & Poor's on Friday downgraded the credit ratings of 11 global banks including Citigroup and Deutsche Bank, citing the increased risk from a deepening global economic slowdown.
Sovereign spreads largely narrowed, though movements were limited. South Korea's five-year CDS tightened by about 5-10 basis points to 330, while the Philippines' five-year CDS tightened to about 350/420, compared to around 375 on Friday morning in Asia time.