HONG KONG -- Asian bond spreads narrowed Monday as investor sentiment was lifted by hopes a US package of tax cuts and higher spending would support the economy, while most Asian central banks are expected to cut rates further.

The Asia iTRAXX investment-grade index excluding Japan, a key measure of risk aversion, narrowed 10 basis points to 320, more than half the record 650 hit in late October.

"Risk appetite has risen as reflected by the positive tone in the stock markets. People are now focusing on the stimulus plan in the US," a Hong Kong-based trader said.

US President-elect Barack Obama will propose business and middle-class tax cuts of up to $310 billion, part of a $775-billion economic stimulus package, senior Democratic aides said Sunday.

Market activity has increased with Japan and other major Asian markets resuming trading on Monday after the New Year holiday.

Trading is also expected to be less volatile in the first half of 2009 compared to last year, said Brayan Lai, credit analyst at Calyon Corporate and Investment Bank.

"We expect credit volatility to be less than what was seen in 2008 as long as there are no more major systemic shocks. Hence, volatility should be kept within a tighter range and should support credit spreads," Lai said.

Asian central banks are expected to cut rates further this year as inflation and growth slows.

Indonesia's central bank meets on Wednesday and the Bank of Korea meets on Friday. Inflation data from various countries in the region this week will also provide clues on the pace at which central banks will be able to cut rates.

The Philippines' five-year credit default swaps (CDS) – or insurance-like contracts that protect investors against defaults or restructuring -- narrowed by 5 basis points to 355.

Manila last month slashed its key rates by 50 basis points and may follow it up with another half-point cut in the first quarter.

Korea's five-year CDS held at 300 basis points, the bottom end of its recent trading range of 300 to 325.

South Korea's central bank is expected by analysts to cut its rates at least 25 basis points, having slashed them by 2.25 percentage points since September.