Emerging debt-Asian bond spreads tighten on lower oil, Fed

HONG KONG, July 9 (Reuters) - Asian debt spreads tightened significantly on Wednesday after a drop in oil prices eased inflation concerns, while credit crisis fears were allayed after the Federal Reserve said it may keep open a lifeline for banks.

The iTRAXX Asia ex-Japan high-yield index ITAHY5UA=ICAP, a key measure of risk aversion, tightened by about 20 basis points (bps) to around 560, down from as much as 586 at one point on Tuesday, according to a trader.

The equivalent investment-grade index ITAIG5UA=GFI narrowed by about 10 bps to around 160 after trading in the mid-170s on Tuesday.

Despite the improved mood, Asian bond investors remained uneasy, given the lack of confidence in the global financial sector and expectations inflation will continue to hit the region's economies.

"Inflation is rising quite fast, and that will have an impact both on the fiscal situation and the balance of payments of the region's economies," said a Singapore-based fund manager for a major foreign asset management firm.

"Corporate profits are beginning to get affected, while funding costs are going to increase because central banks are going to tighten monetary policy," he added.

Asian sovereign and corporate debt markets have been hit hard this year. The iTRAXX high-yield index is below the record high above 650 hit in mid-March in a previous bout of jitters linked to the credit crisis but is still more than double the spreads at the end of 2007.

Sentiment improved after oil prices tumbled more than $5 on Tuesday. However, U.S. crude futures CLc1 were trading at $136.96 as of 0540 GMT, up $0.92 from Tuesday.

Worries about the global financial sector eased after Fed Chairman Ben Bernanke said on Tuesday the U.S. central bank may keep an emergency lending facility for big Wall Street firms open longer than intended. [ID:nN08304308]