Emerging debt-Asian spreads tighten, but Thailand fears persist

HONG KONG, Dec 3 (Reuters) - Asian bond spreads tightened on Wednesday, reversing the sharp widening in the prior session, amid a recovery in equity markets and hopes central banks will aggressively cut rates in the face of a global downturn.

But the cost of protection against a default in Thailand's debt rose slightly, even after anti-government protesters ended their occupation of the country's main international airport.

Credit investors fear more political instability and possible violence after a court banned Thai Prime Minister Somchai Wongsawat from politics for five years and disbanded his party. [ID:nWLA2716]

Concerns over credit ratings downgrades and even defaults in Asia's corporate sector could also dominate in the short-term, keeping spreads from tightening too much, traders said.

Bonds backed by Malaysian palm oil producer IOI Corp (IOIB.KL: Quote, Profile, Research) and Indonesian mobile operator PT Mobile-8 Telecom Tbk (FREN.JK: Quote, Profile, Research) remained under pressure after both were downgraded by credit rating agencies on Tuesday.

"It is difficult to see the rally in equities being sustained and it will not take much in the way of more bad economic news to bring a dose of reality back.," Calyon analysts said in a note to clients on Wednesday.

The Asia ex-Japan iTRAXX investment-grade index <0#ITAIGMPBMK=> tightened by 15-20 basis points to 405, erasing most of the sharp widening seen on Tuesday.

The moves came after gains in global stock markets and ahead of expected interest rate cuts by policymakers from the euro zone to New Zealand at meetings this week.

Regional credit spreads have outperformed their European and U.S. counterparts, which have been hitting new record highs -- levels that in Asia were breached in late October.