Selective rally set to continue in Asia debt market

Selective rally set to continue in Asia debt market

HONG KONG (Dow Jones): This year's rally by Asian bonds is
expected to continue into next year, but at a much slower pace,
debt investors and analysts say.

They also warn that investors will have to be much more
selective in the coming year, accepting only modest gains in
already expensive benchmarks, looking for value by extending debt
maturities or moving to bonds with lower credit ratings.

Asia's continuing economic recovery, improving liquidity and a
lack of new issues are expected to sustain recently strong demand
for Asian bonds into 2000, analysts say.

"There's still considerable interest from the foreign
(investor) side in Asia," Rosa Wang, deputy chief investment
officer for Dresdner RCM Global Investors, said at a fixed income
investor seminar this week in Hong Kong. "We still expect foreign
flows coming in."

Benchmark Asian spreads have tightened significantly this
year, as economies around the region have recovered and credit
rating agencies have reversed earlier downgrades for some
countries. During the second half, some Asian bonds narrowed to
pre-crisis levels in spread terms, with some sovereign bonds
issued during the crisis, such as the Korea '08, falling to
lifetime lows.

Fading Y2K fears have helped sustain the rally, as an expected
rush of third-quarter issues failed to materialize and investors
who were supposed to shun seemingly risky Asian bonds instead
snapped them up.

The spread over U.S. Treasurys on the Korea sovereign bond due
in 2008 has tightened by around 225 basis points over equivalent
US Treasurys from a year ago, to 170 points now, while that of
Petronas 2006, the Malaysian benchmark until May this year, has
tightened by more than 400 basis points, also to around 170 basis
points

Stephen Taran, SSB's global head of sovereign credit research,
told industry executives meeting in Hong Kong this week that over
the next six months, the Malaysian '09 and Korean '08 bonds could
both tighten to 150 basis points over Treasurys, from around 170
basis points currently. That compares favorably with high triple-
B U.S. corporate, which are now in the range of 120 basis points,
he said.

While some analysts also hold out hope for a liquidity-driven
rally after the Y2K effect is past, most analysts warn that
making money in Asian bonds will be much tougher in the year
ahead.

"It's going to be a lot harder to make the kind of money in
2000 as in 1999," Albert Cobetto, managing director of Prudential
Asia Fund Management in Hong Kong, told industry executives this
week. He said he'll be looking more at sectoral plays, including
financial institutions.

Dresdner's Wang says she has a "strong preference" for the
North Asia region, and, in sectoral terms, sees value in
cyclical such as steel and petrochemicals.

Still, market watchers warn that while the global environment
appears more steady than a year ago, there are still potential
problems ahead. Continued progress in Asian restructuring and
reform, particularly in banking sectors around the region, needs
to be monitored. Meanwhile, the outlook for U.S. interest rates,
and their implications for foreign investment in Asia, remains
unclear.