Emerging debt-Asian spreads tighten; Thailand, S.Korea rebound

HONG KONG, Sept 3 (Reuters) - Asian bond spreads tightened slightly on Wednesday as a continued slide in oil prices reinforced expectations that inflation will ease from decade highs across much of the region.

Spreads in Thailand tightened as well, though caution still prevailed as thousands of opposition protesters continue their campaign to oust Prime Minister Samak Sundaravej a day after emergency rule was declared in the capital. [ID:nSP218679]

South Korea is another major concern for regional investors, though there was also some relief on Wednesday after the won currency and stock markets recovered from two days of turmoil sparked by fears of massive capital flight out of the country.

But spreads are unlikely to tighten significantly in the near term after Deputy Finance Minister Shin Je-yoon said on Wednesday South Korea will go ahead with plans to sell around $1 billion in sovereign bonds. A source with knowledge of the deal told Reuters the country was planning a bond roadshow as early as next week.

"It's a calmer situation now, but the concerns over Thailand and South Korea are still there," said a Hong Kong-based trader, predicting spreads would remain volatile this week.

The iTRAXX Asia ex-Japan high-yield index ITAHY5Y=IE, a key measure of risk aversion, tightened by 3-5 basis points (bps) to around 555, though the equivalent investment-grade index ITAIG5Y=IE was range-bound at around 160.

The relief after a volatile week came after oil prices fell below $110 a barrel on Tuesday as Hurricane Gustav caused only minor damage to oil installations in the U.S. Gulf coast.

A slowing global economy is also expected to reduce demand for crude, contributing to the declines. U.S. crude CLc1 was down 51 cents at $109.21 as of 0500 GMT.

Lower oil prices would further reinforce a growing consensus that inflation has or is about to peak in the region.

In the Philippines, a senior central bank official said on Wedneday annual inflation was likely to reach its peak this month or next, with the rate going back to single digit levels by March or April next year. [ID:nMNT000111]

But Philippine's sovereign cash bonds reversed early gains amid concerns of continued heavy foreign borrowing next year. The government said on Wednesday it planned to raise $2.5 billion in a mix of sovereign debt and official development loans, slightly more than this year. [ID:nMNT000113]

Philippines' 2031 bonds PHIGLB31=RR rose to as high as 110.375 before coming down to 109.875/110.125, in line with levels on Tuesday. Bonds maturing in 2032 718286BD8=RRPS rose as high as 97, but then drifted lower to 96.625/96.875.

POLITICAL RISKS

Elsewhere in the region, the cost of protection against Thailand's debt felt by several basis points to 140, as indicated by its five-year credit default swap (CDS) THAILD5UA=GFI, though caution still remains about political instability.

Similarly, South Korea's five-year CDS KOREA5UA=GFI tightened by a few bps to 122, following a small rebound in the won currency and local stocks.

A potential onslaught of new deals, including South Korea's sovereign debt sale, is soon expected, which could keep spreads from tightening too much.