HONG KONG -- Asian bond spreads tightened Monday on hopes that major US auto makers may yet be rescued by the government though credit markets remain subdued ahead of the Federal Reserve's meeting this week.
Caution also prevailed after Ecuador declared a default on $3.8 billion worth of its sovereign bonds and refused to pay a $31 million interest payment due on Monday on its 2012 global bonds. The country also warned bond holders to expect a hefty cut in the nominal value of the defaulted debt.
Though investors said they did not expect a barrage of similar measures from other countries, it emphasized the frail conditions of credit markets given uncertainty as well about the debt held by US auto makers and as auto and mortgage finance company GMAC LLC struggles to complete a debt swap.
"Protection spreads are indicated tighter this morning in Asia," said Brett Williams, an analyst at BNP Paribas in an email to clients.
"Wild price gyrations and volatility on thin trade flows exacerbate movements in CDS (credit default swaps) and basis. We recommend the sidelines for this market," he added.
The Asia iTRAXX investment-grade index excluding Japan, a key measure of risk aversion, moved in by 20 basis points (bps) to around 385, erasing a sharp widening of more than 30 bps on Friday.
Spreads had widened on Friday after the US Senate rejected a bailout plan for struggling auto makers, though those fears eased after the US White House said later that day it would be willing to provide emergency aid.
Still, plenty of uncertainty remains, including about the Federal Reserve policy meeting ending on Tuesday, as well as quarterly results from Goldman Sachs and Morgan Stanley, both of which are expected to post substantial losses.
Among the active movers on Monday, South Korea's five-year CDS -- insurance-like contracts that protect investors against defaults or restructuring -- tightened by about 20 basis points to 350.
The country's central bank on Friday said it had agreed on new currency swap deals with counterparts in Japan and China equivalent to nearly $50 billion, which comes on top of an existing $30 billion swap line with the US Fed.
In cash bond markets, 2012 debt from Hynix Semiconductor fell 5 points to 50 cents to the dollar after Fitch downgraded its ratings on the South Korean chip maker to B-plus from BB-minus, due to worsening profitability and financial condition.
Tata Motors' bonds due in 2011 and 2012 were range-bound at 62.5 cents and 43 cents to the dollar respectively, even after Standard & Poor's on Friday downgraded the Indian auto maker to BB-minus from BB.
The action stems from the worsening outlook for the global car making sector, and comes after Moody's had downgraded Tata to B1 in late November, or one notch below S&P's new rating.
