Bond Risk in Asia Falls as U.S. Congress Agrees on Budget Bill

Bond risk in the Asia-Pacific region fell to a two-week low as U.S. politicians approved a bill to avert automatic tax increases and spending cuts.

The cost of insuring company and sovereign bonds from non-payment in the Asia-Pacific region outside of Japan dropped to the least since Dec. 19, according to credit-default swap traders.

The U.S. House of Representatives agreed to a bill canceling $600 billion of automatic spending cuts and tax increases which were due to take effect from Jan. 1 and which the Senate had passed earlier. Companies in Asia pay an average 3.86 percent to sell U.S. dollar-denominated bonds, the least in data going back to 1996, according to Bank of America Merrill Lynch indexes as of Dec. 31.

“Temporary fixes aside, things will probably be geared toward risk-on over the next one to two months,” said Brayan Lai, an analyst in emerging-market credit trading at Jefferies Group Inc. in Singapore. “If anything, when they discuss the legal cap on the debt ceiling itself in February, the market might pause then to see what the politicians in the U.S. finally decide on. But ultimately there’s going to be a resolution.”

The bill undoes income tax increases for more than 99 percent of households, handing a victory to President Barack Obama even as Republicans vowed to fight him in coming weeks for spending cuts in exchange for raising the debt ceiling. The MSCI Asia Pacific excluding Japan Index, a benchmark stock index in the region, climbed 2 percent as of 2:38 p.m. in Hong Kong, heading for its highest close since August 2011.

Credit Risk

The Markit iTraxx Australia index was trading at 121.5 basis points as of 5:11 p.m. in Sydney, Australia & New Zealand Banking Group Ltd. prices show. The index closed at 127.5 basis points Jan. 1 and is set for its lowest close since Dec. 19, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan fell 5 basis points to 108 basis points as of 9:58 a.m. in Hong Kong, according to Royal Bank of Scotland Group Plc. The index is also on course for its lowest close since Dec. 19, having fallen 93 basis points last year, according to CMA.

Markets in Japan are closed for a national holiday. The Markit iTraxx Japan index, which ranged from 136.2 to 229.5 in 2012, fell 27.8 basis points last year to 159 as of Dec. 28, according to CMA.

Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE