Fed's hint of a measured rather than sharp rise relieves markets although some uncertainty remains Fears of a sharp rise in United States interest rates eased yesterday, sending Hong Kong stocks and bonds higher and arresting a five-day surge in domestic rates. 'In some ways, we might have turned a corner,' JP Morgan rates strategist Simon Klassen said. 'Concerns that US rates might be forced 50 basis points higher this month have returned to expectations of a 25 basis-point rise.' However, HSBC Securities regional strategist Nilesh Jasani warned that investors faced the danger of policy uncertainty in Asia now that the interest-rate anxiety was temporarily out of the equation. 'What we have seen is more like a reality check. Most Asian banks are resisting interest-rates increases, but to keep their economies growing, they might resort to other measures - such as cutting import taxes or raising fuel subsidies,' he said. 'So we may see policy volatility replacing interest-rate volatility, and it is difficult to say what might happen.' Continued uncertainty was also forecast in the short term for local equity and bond markets by Joseph Yam Chi-kwong, chief executive of the Hong Kong Monetary Authority, which manages the government's $1 trillion Exchange Fund. 'To be sure, the difficult investment environment is not helping us in our attempt to meet the budgeted investment income for the fiscal reserves [which form part of the Exchange Fund's assets],' Mr Yam told a Hong Kong Institute of Bankers lunch yesterday. 'Disappointments on these fronts may affect market sentiment in the short term.' A 'measured' rise in US interest rates was signalled on Tuesday by US Federal Reserve chairman Alan Greenspan and coincided with inflation data that indicated a moderate rise in core prices. The new sentiment would help regional stock markets and bond prices, as well as ease recent pressure on domestic interest rates, analysts said. The three-month Hong Kong interbank offered rate fell more than four basis points on the latest developments, from 0.66071 per cent to 0.61942 per cent. On the bond markets, yields fell by about 16 basis points as speculators scrambled to cover short positions. 'The fast money was definitely betting on a larger inflation number and a 50 basis-point rise in rates and that was evident in short interest rate and bond positions,' Mr Klassen said. 'As it happened, they didn't get what they were expecting and those who had sold bonds heavily in expectation of a bigger rate rise had to move quickly to cover their positions.' In Hong Kong, the yield on the benchmark 10-year government bond retreated 16 basis points - from 4.87 per cent to 4.71 per cent - under the weight of buy orders. A rise in bond prices as a result of increased demand results in a fall in yields. Hong Kong's financial markets also face continuing uncertainty over the outlook for the mainland economy, which some analysts fear could be headed for a hard landing as policymakers try to rein in growth to combat inflation. However, HSBC China economist Hongbin Qu said interest-rate increases on the mainland were likely to be modest and a preference by policymakers for credit-tightening measures was likely to succeed in engineering a soft landing for the economy. 'We still hold the view that a moderate rate hike in China is likely in the next couple of months and I don't think this will have a meaningful impact on Hong Kong,' he said.