Bond Default Risk Plunges on $1 Trillion U.S. Toxic Asset Plans

March 24 (Bloomberg) -- The cost of protecting Asia-Pacific bonds from default plunged after the Obama administration announced a $1 trillion plan to help remove toxic assets from U.S. banks’ balance sheets.

The Markit iTraxx Japan index of credit-default swaps dropped 40 basis points to 367, the biggest one-day fall since Dec. 12, Credit Suisse Group AG prices show. The Markit iTraxx Australia index fell 15 basis points to 355 as of 11:55 a.m. in Sydney, Citigroup Inc. data show.

The Treasury, Federal Reserve and Federal Deposit Insurance Corp. will provide private investors with financing to buy illiquid loans and securities held by banks, the Treasury said yesterday. The Public-Private Investment Program will use up to $100 billion from the $700 billion Troubled Asset Relief Program enacted last year, giving the government “purchasing power” of $500 billion, which may double over time, the Treasury said.

The new program “should support asset values and liquidity,” Deutsche Bank AG Sydney-based analysts Gus Medeiros, Colin Tan and Ken Crompton said in a note to clients today. The new mechanism for asset purchases removes some uncertainty and “may prevent banks from hoarding assets to avoid writedowns.”

U.S. stocks rallied, capping the market’s steepest two-week gain since 1938, as investors speculated the plan will spur growth and revive lending without the government being forced to nationalize banks. Asian stocks rose today as South Korea said it will spend a record $13 billion on cash handouts, cheap loans, new infrastructure and job training to counter what may be the nation’s first recession in more than a decade.

Korea, Macquarie

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan was 10 basis points lower at 360 as of 9:10 a.m. in Singapore, Barclays Capital data show. The cost to protect South Korean government debt from default for five years fell 10 basis points to 350.

Contracts on the senior debt of Macquarie Group Ltd., Australia’s largest investment bank, fell 50 basis points to 700, according to Citigroup. That’s the swaps’ biggest one-day decline since Jan. 2, according to CMA DataVision prices.

The Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada declined 13 basis points to 185 yesterday, according to CMA DataVision.

Credit-default swap indexes are benchmarks for protecting bonds against default, and traders use them to speculate on changes in credit quality. An increase in the price suggests deteriorating investor perceptions of credit quality and a decrease indicates improvement.

The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt.