And if oil prices continue this week's record-setting march and the US interest rate cycle shows no

sign of peaking, it could be sooner still.

For the moment, however, ratings agencies remain sanguine about Asian credits and believe

historically low defaults in 2004 and 2005 (zero and one, respectively, in the S&P ratings' universe),

are not likely to erupt in a bloodbath for investors who were tempted into higher-risk credits for the

superior returns.

That confidence was on display this week with the revision by S&P of the Hong Kong sovereign

outlook to 'positive' from 'stable', which, it said, reflected 'the continuing improvements in Hong

Kong's fiscal situation, particularly the discipline shown by the administration in controlling

expenditure'.

Budget surpluses should be maintained over the next few years, it said, though it added the caveat that

this would depend on economic growth continuing on its present course. The upgrade triggered

upward adjustments in the local and foreign currency long-term credit ratings of 10 blue-chip Hong

Kong corporates.

So far so good.

But come 2007 and those caveats about economic growth rates, and the outlook may no longer be

quite so glowing. Treasurers managing the surplus cash flows generated by all that economic growth

around the region might therefore be well advised to begin monitoring average tenors and risk profiles

in their bond portfolios rather closely in the coming months.

For the past two years, Asia ex-Japan had seen 'sizzling growth' in speculative grade, or high-yield,

bond issues, noted S&P in its 2006 handbook on Asian high-yield ratings. Fuelling that growth was

demand from investors chasing higher yields, which in turn encouraged high-yield companies with

pressing funding needs to issue bonds.

Consider, though, the impact of a return just to 'normal' default trends as economic growth begins to

slow down - let alone the financial distress that would accompany the worst-case scenarios for the

region of sky-rocketing oil prices or an outbreak of avian flu.

The surge in lower-grade issuance, added S&P, was 'usually a warning sign of renewed default

pressures' and a high-yield default study showed that an average of 18 per cent of all B-rated category

credits and 6 per cent of all BB-rated category credits have historically defaulted within three years.

Any return to the norm is unlikely to take ratings agencies - or the market, therefore - entirely by

surprise, however. There are usually some early warning signals that precede such a turnaround,

according to the S&P managing director (Asia) for corporate and infrastructure ratings. The signals

may include evidence that companies are over-reaching themselves and taking on more debt than

they can safely afford for mergers and acquisitions; becoming unduly aggressive with their organic

growth strategies; or missing their forecasts on revenues and earnings.

For the moment there are no alarm bells ringing, he says. But investors might be advised to closely

study the financial statements issued by the firms whose bonds they hold.

Then there is property, which until recently has been a no-brainer of an investment proposition in Hong

Kong - especially so for those with a soft spot for property in their investment portfolios. (Read: the

entire adult Hong Kong population - whatever rude awakening may have been delivered by the 60 per

cent dive in property prices during the Asian financial crisis of 1997-98.)

The faith shown by Hong Kong investors in property is likely to be justified, depending on the time

horizons. Certainly those who bailed into the market over the past two years will have no difficulties

justifying their decisions.

Prices had fallen sharply during the financial crisis and buyers could leverage their investments by

using low-cost bank borrowing; taking an equity stake of just 30 per cent; earning a rental yield of

maybe 8 per cent; and booking a double-digit return on the equity.

A no-brainer.

But that compelling investment argument has now attracted a flood of private equity into property

markets not only in Hong Kong but throughout the region, and as prices have been bid higher under

this weight of liquidity, interest rates have been on the march.

That means yields have tumbled and the days of easy money are beginning to disappear. Yields in

Hong Kong from investment-grade commercial property, for instance, are now down to 4 to 4.5 per

cent, analysts point out, while the three-month Hibor (Hong Kong interbank offered rate - the

benchmark interest rate in the wholesale market, off which loans are priced by bankers) has risen to

more or less the same level.

The result is the danger of a negative carry on many remaining investment propositions, since

capitalisation rates are narrowing down towards borrowing costs.

'Last orders, please!' (For the moment, anyhow.)