Emerging debt-Asian bonds jump on support for banking sector

HONG KONG Oct 14 (Reuters) - Asian bond spreads snapped tighter on Tuesday as governments around the world pledged support for the banking sector, boosting investor confidence in the financial system across the globe.

But analysts said expectations of poor corporate earnings and overall risk aversion capped gains.

Overnight, both the Dow Jones industrial average .DJI and the S&P 500 .SPX index rose 11 percent each, posting their biggest one-day gain ever after the governments of Britain, Germany, France and other European countries promised more than 1 trillion euros ($1.36 trillion) to their banks.

On Tuesday, Japan's government also announced a series of steps that could include a law allowing it to inject public funds into regional banks.

South Korean Finance Minister Kang Man-soo was quoted as saying Korea could raise guarantees on deposits and might even guarantee banks' foreign currency debt.

That triggered a sharp rally in Asian stocks and bonds and pushed down the cost of credit protection.

The iTRAXX Asia ex-Japan high-yield index ITAHY5Y=IE, a key measure of risk aversion, moved in 50 basis points (bps) to 750/825 bps and the equivalent investment-grade index ITAIG5Y=IE tightened by a similar margin to 230/260 bps.

Sovereign credits which had suffered the most in the recent meltdown amid fears regional governments will have to bail out their banks, enjoyed the biggest maximum improvement along with banks on Tuesday.

South Korea's five-year credit default swaps (CDS) KOREA5UA=GFI -- insurance-like contracts that protect against defaults and restructuring -- were traded at 250/270 bps, compared with Monday's 350 bps.

China's 5-year CDS CHINA5UA=GFI tightened 20 bps to 80/100 bps and Malaysia 5-year CDS MALAYS5UA=GFI moved in to 135/150 bps from 190 bps.

India's ICICI Bank (ICBK.BO) 5-year CDS ICIC5YUSAC=GF tightened to a mid-point of 712.50 bps from 775 bps.

"From the credit desk, we see the guarantee programmes as a transformative event that has financials as the new sovereigns, and the sovereigns as the new monolines," said Brett Williams, credit analyst with BNP Paribas.

"Our argument is simply that as credit risks are transferred from the banks to the sovereigns, so too should the spread risk premia," Williams added.

Credit spreads have ballooned since September amid fears the financial crisis will spread to Asia, especially in countries such as South Korea, Indonesia and India that are seen having weaker current account positions and where the bank sector may need financial assistance.

Analysts said corporates would be ignored in the initial stage of the rally and these credits would attract buying only if the recovery was a sustained one.

"I don't think we are out of the woods yet. At this point I would sink my teeth into sovereigns and banks which would be supported by the government. I would not look at corporates," said a Singapore-based credit analyst.

Philippine debt, one of the most actively traded bonds, in the region also strengthened but traders expect some profit-taking to kick in soon.

The 2032 bonds 718286BD8=RRPS jumped 4 points to 82/84 cents to a dollar while the 2031 bonds PHIGLB31=RR also rose by a similar margin to 92/95.

But analysts said they expected trade to remain volatile as investors brace for more bad news.

"This is not over by any means. When banks post results, the expectation is that numbers are going to be catastrophic -- horrible," said a Hong Kong based trader.

FIVE-YEAR CREDIT DEFAULT SWAPS

Bid/Ask spread

Current Week ago Korea Dev Bank 550/~ 320/~ Hutchison 240/~ ~/295 PCCW-HKT ~/600 ~/395 China ~/98 ~/110 Indonesia ~/745 415/~ Korea 250/~ 251/~ Malaysia ~/190 ~/220 Philippines ~/370 310/~ ~ no bid or ask spread For CDS prices double click on GFICDS ASIAN BENCHMARK DOLLAR BONDS

Coupon Maturity Bid price Bid spread

5-YEAR

------

DBS Bank 7.13 15-May-11 103.98 239

Malaysia 7.50 15-Jul-11 106.63 183

ICICI Bank 5.75 12-Jan-12 90.77 602

Petronas 7.00 22-May-12 105.94 210

Hutchison 6.50 13-Feb-13 94.60 493

Chartered Semi 6.25 4-Apr-13 90.78 572

Korea 4.25 1-Jun-13 88.77 407

United Overseas 4.50 2-Jul-13 90.85 373

PCCW-HKT 6.00 15-Jul-13 101.18 266

China 4.75 29-Oct-13 101.09 144

10-YEAR

-------

Hutchison 7.45 24-Nov-33 88.08 456

Korea 4.88 22-Sep-14 92.25 241

PCCW-HKT 5.25 20-Jul-15 78.84 551

Woori Bank 6.13 3-May-16 88.09 424

Penerbangan 5.63 15-Mar-16 102.93 110

Philippines 8.75 7-Oct-16 100.00 469

Indonesia 6.88 9-Mar-17 75.00 756

ICICI Bank 6.38 30-Apr-22 54.22 1019

Petronas 7.88 22-May-22 119.97 168 (Reporting by Umesh Desai; Editing by Tomasz Janowski)