EMERGING DEBT
Asian bonds rise in cautious rally
Reuters
First Posted 13:39:00 09/22/2008
Filed Under: Emerging Markets Debt, Government Debt, bonds and t-bills
HONG KONG -- Asian bonds were higher Monday on investor hopes that a proposed US government bank bailout plan may prevent further financial market turmoil, but gains were capped by caution over the scheme's wider economic impact.
Sentiment was also boosted by the approval given to Wall Street banks Goldman Sachs and Morgan Stanley to become bank holding companies, which allows them to borrow permanently from the central bank and gives the firms access to deposits.
The move puts the last two major US investment banks squarely within the government safety net.
The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion, moved in by 40 basis points (bps) to 620/640 bps. The equivalent investment-grade index moved in by 10-20 bps to 158/168.
"(The US bailout plan) is definitely a welcome step – it takes out the uncertainty about two big entities failing," said a Manila-based trader, but he added there were some concerns on the plan's wider impact.
"They will be printing money so it's inflationary at a time when the US economy is not very strong."
This was reflected in patchy gains. While bonds from Philippines, one of the most active debt issuers in Asia, rose, the cost of protecting its debt remained unchanged.
Bonds from Manila due in 2031 were quoted at 108.75/109.25 cents to a dollar, while debt due in 2032 traded at 95.75/96.25, both higher by half a point.
Its credit default swaps (CDS) -- insurance-like contracts that protect against defaults and restructuring -- were steady at 245/255 bps.
The Bush administration and Congress on Sunday ramped up talks on an unprecedented $700-billion bank bailout for the largest-ever bank rescue, which would give sweeping powers to the US Treasury to buy up toxic mortgage-related debt from financial firms, including US subsidiaries of foreign banks.
The plan was hatched amid concerns that other big banks could collapse and that credit markets were close to freezing, threatening the US and global economy.
But Merrill Lynch said in a report released on Monday that the proposal could help stabilize asset prices, but would not resolve the uncertainty that plagues the fate of many US institutions.
"Determining which institutions to save is not an easy task... It's simply too hard to separate illiquid institutions from insolvent ones," the note said.
Meanwhile, Standard & Poor's forecast that further home price declines and economic weakness will continue to pressure credit quality among banks.
"We anticipate that bank failures will continue to rise during the next several quarters as the credit downturn progresses," the credit ratings agency it said in a report.
The cost of buying protection on debt from Pakistan rose after a suicide bomb attack killed 53 people in Islamabad, raising questions about security risks in the South Asian nation.
The five-year CDS was not traded but a trader said it was quoted at 1,500 bps, about 50 bps wider than Friday.
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