Hong Kong: Asian bonds rose on Wednesday as cautious buying returned to emerging Asian markets after the Federal Reserve slashed its benchmark interest rates to near zero and indicated there would be quantitative easing measures.
But risk appetite is unlikely to normalise in debt markets any time soon especially after a brutal quarter when benchmark spreads doubled at one point and ahead of a bulging pipeline of new bond supplies.
In a historic move, the Fed lowered its target for the benchmark federal funds rate to a range of 0 to 0.25%, a record low, from 1.0%, and said it was willing to keep rates low for an extended period.
The Asia iTRAXX investment-grade index excluding Japan, a key measure of risk aversion, moved in by 30 basis points (bps) to 370/385 bps.
“It’s very much a knee jerk reaction but they also said they will use all available tools to expand their balance sheets,” said a Hong Kong based trader.
The Fed said, it was prepared to expand a plan to purchase large amounts of debt issued or guaranteed by government sponsored mortgage agencies.
It also said that it was mulling possible purchases of longer term US Treasury debt and would consider other ways to tap its burgeoning balance sheet to support the economy.
In Asia, cash bonds, which have suffered low activity levels in recent months were better traded with sovereigns accounting for most of the volumes.
Indonesia’s bonds due in 2038 were traded up at 76/81 cents on the US dollar, compared with the previous 73/74.
The cost of insuring its debt also declined.
Indonesian 5-year credit default swaps insurance like contracts that protect against defaults and restructuring contracted by 20 bps to 625/675 bps.
But gains were muted as many borrowers would look to approach the market to issue fresh debt.
The Philippines, one of Asia’s largest sovereign debt issuers, hopes to cover much of its $1.5 billion total in 2009.
The government plans to raise $1.5 billion in the overseas debt market in 2009 to help keep its budget deficit at 102 billion pesos ($2.1 billion).