Emerging debt-Asian bonds weaker on caution, but not gloom

HONG KONG, July 29 (Reuters) - Asian bond spreads widened on Tuesday after further writedowns at U.S. investment bank Merrill Lynch (MER.N: Quote, Profile, Research) intensified concerns about the wobbly global financial sector.

But traders said credit markets had not reacted so sharply as global equity markets, given that debt investors had already priced in the risk of intense volatility this year, including from expectations of surging inflation.

Investors also took comfort at Merrill's agreement to help bail out Security Capital Assurance (SAC) (SCA.N: Quote, Profile, Research), easing worries about the ripple effects a failure at the U.S. bond insurer would have caused across the global credit markets. [ID:nN28815]

The iTRAXX Asia ex-Japan high-yield index <ITAHY5UA=ICAP>, a key measure of risk aversion, widened by 5-10 basis points to 535/540.

That remains below the record just above 650 hit in March before the rescue of U.S. investment bank Bear Stearns, and below the monthly high of 580 hit on July 8, when concerns about the financial sector had began to intensify.

The iTRAXX investment-grade index <ITAIG5UA=GFI> widened by 4 bps 140 on Tuesday.

"All in all, credit markets have outperformed equities this month, and although we are a bit weaker today we are still doing better than equities," said a Hong Kong-based trader.

"I think for now investors have already set their positions, so trading is pretty quiet at this stage."

Asian equity markets slumped after Merrill Lynch said on Monday it would take a $5.7 billion third-quarter write-down to unload huge amounts of risky debt and would raise $8.5 billion by selling new stock. [ID:nN28254377]