THE HSBC Hong Kong Bond Index continued its recovery, gaining 2.7 per cent in March to end at 105.25, up from 102.44 in February, HSBC Markets says. Andrew Fung, the HSBC Markets manager for swaps and trading, yesterday attributed the upturn to strong gains in the United States interest rate market, where expectations that rates were near their peak stimulated investor appetite, particularly for long-term US-dollar securities. Hong Kong-dollar bonds continued to benefit from the narrowing of the differential between US and Hong Kong rates, Mr Fung said. Demand in Hong Kong focused on medium and short-term issues and the more liquid Exchange Fund notes, he said. He said investors were still expecting one last rise in rates so the Hong Kong fixed-income market had been sluggish in March. Excluding Exchange Fund notes, total volume stood at about $2.75 billion for the first quarter, down from $3.5 billion in the same period in 1994. Fund managers have been hesitant to re-enter the market and short-term rates were offering yields below Hong Kong's inflation rate. In February, two-year and three-year paper offered yields of nine per cent and 9.5 per cent. It marked the first time since 1991 that investors in Hong Kong-dollar debt could enjoy real above-inflation yields in short-term debt securities. Earlier this year, the differential blew out after the collapse of the Mexican peso panicked investors in emerging markets world-wide. The incident sparked a sell-off of Asian currencies, including the Hong Kong dollar. The HSBC Hong Kong Bond Index was launched in December 1993, which corresponds to 100. It is composed of 45 issues, carries a current market-weighted maturity of 3.31 years, and a weighted yield of 7.75 per cent.