Asian spreads tighten on U.S. auto bailout hopes

HONG KONG (Reuters) - Asian bond spreads tightened on Monday on hopes that major U.S. 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 U.S. 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 U.S. Senate rejected a bailout plan for struggling auto makers, though those fears eased after the U.S. 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 credit default swaps (CDS), or 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 U.S. 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.

FIVE-YEAR CREDIT DEFAULT SWAPS

Bid/Ask spread

Current Week ago

Korea Dev Bank 440/~ ~/505

Hutchison 360/420 380/~

PCCW-HKT 400/~ 450/~

China 190/240 220/~

Indonesia ~/770 ~/850

Korea 350/~ 395/445

Malaysia 260/~ 300/~

Philippines 400/~ ~/525

~ no bid or ask spread

For CDS prices double click on

ASIAN BENCHMARK DOLLAR BONDS

Coupon Maturity Bid price Bid spread

5-YEAR

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DBS Bank 7.13 15-May-11 100.83 520

Malaysia 7.50 15-Jul-11 105.80 354

ICICI Bank 5.75 12-Jan-12 74.88 149

Petronas 7.00 22-May-12 103.61 428

Hutchison 6.50 13-Feb-13 96.19 603

Chartered Semi 6.25 4-Apr-13 80.02 108

Korea 4.25 1-Jun-13 94.85 402

United Overseas 4.50 2-Jul-13 90.13 552

PCCW-HKT 6.00 15-Jul-13 101.18 418

China 4.75 29-Oct-13 104.06 228

10-YEAR

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Hutchison 6.25 24-Jan-14 85.00 637

Korea 4.88 22-Sep-14 90.70 426

PCCW-HKT 5.25 20-Jul-15 71.01 908

Woori Bank 6.13 3-May-16 74.13 890

Penerbangan 5.63 15-Mar-16 91.91 447

Philippines 8.75 7-Oct-16 94.00 727

Indonesia 6.88 9-Mar-17 79.00 819

ICICI Bank 6.38 30-Apr-22 51.13 1169

Petronas 7.88 22-May-22 106.13 456

(Reporting by Rafael Nam; Editing by Neil Fullick)