Asian bond spreads narrowed on Tuesday as sentiment was lifted by news that the United States will expand a bailout of its troubled auto industry. The US administration said on Monday it was buying $5 billion in equity in auto-and-mortgage-finance company GMAC and raising a loan to General Motors by $1 billion.
The Asia iTRAXX investment-grade index excluding Japan, a key measure of risk aversion, narrowed by 10 basis points to 330 bps. The contract was being offered at 380 bps. However, overall trading was light owing to the Christmas and New Year holidays.
The benchmark high-grade iTRAXX index has surged more than five-fold since 2007, though it will end the year below a record of around 650 hit in late October. Asian bond spreads have swelled in 2008, as investors demanded bigger premiums for holding debt due to the global financial crisis. "Obviously, the fate of the three auto companies in the United States is getting clearer," said a Hong Kong-based dealer.
Direction could be set by corporate earnings announcements in the first quarter of 2009 and any debt sales from Asian governments, a trader said. "The earnings results will give direction to the market in general," a trader said. "There are no Asian public issuance in a long time. If that happens, that could excite the market."
South Korea's five-year credit default swap (CDS) - or insurance-like contracts that protect investors against defaults or restructuring - remained steady at 300 basis points. Authorities said on Tuesday they will ramp up the amount of financial support for banks in 2009 to help tackle the global financial crisis. Data also showed business sentiment at a record low and that the current account swung to a deficit again in November, keeping the balance of payments in the red.