TWO big issues are set to dominate capital markets in Hong Kong next year - the airport and interest rates. Interest rates and extension of the Hong Kong dollar yield curve are likely to influence the number of swap partners available, and the stream of off-shore issuers in local currency and supporting local corporate issuers. Currently steep and positive, the yield curve is allowing investors an excellent ride by means of leveraged investment, according to Andrew Ferguson, deputy managing director at Wardley Capital Markets. ''Investors have really woken up to the potential of Hong Kong dollar bonds,'' he said. ''Private bank clients are leveraging borrowings and investing in bonds. They are borrowing short and lending long, but borrowing 80 per cent of the stake, which they can do because of the quality of the investment.'' Mr Ferguson said the grossing up of returns in this way hugely increased yield but the risk existed of a capital loss. ''That is the risk you take, but we've seen demand for Hong Kong paper all over the world,'' he said. ''Hong Kong dollar fixed income is seen as a quasi-US dollar investment with a yield pick-up.'' The yield curve is likely to go on attracting investors long into 1994, according to Mr Ferguson and Patrick Thomas, managing director of Hong Kong specialist Oakreed Financial Services. ''The jury is still out on interest rates,'' Mr Ferguson said. Mr Thomas said: ''Everyone in the market has predicted and discounted an up-tick in US interest rates. ''One thing you can be sure of, the Federal Reserve will not choke off growth. Even with stronger economic figures in the US, there seems to be no inflationary pressure yet.'' Mr Thomas also believes the trend in rates outside the US is down. ''We are neutral-to-slightly-bearish on rates; slightly bearish means you can ride the yield curve.'' But he is concerned about the liquidity position in Hong Kong. Although short-term rates have given a picture of high liquidity, banks have repeatedly returned to the markets to raise fixed or floating rates funds by issuing certificates of deposit or notes - even Hongkong Bank has issued $3 billion. ''If there really is such high liquidity, why are the banks coming to the markets in such numbers? And why are local banks prepared to pay such margins on deposits?'' Mr Thomas asked. However, the big issue for the local market remains the airport. Throughout the tortuous process of negotiating on Chek Lap Kok, the debt and capital-markets community have watched with increasing lust and increasing frustration. The 10 core airport programmes are thought to be worth some $164 billion in out-turn costs and pre-1997 government expenditure is set to be $60 billion. But the political row with China has intervened and left those involved in the projects, especially those financing them, frustrated and sometimes angry. The Mass Transport Railway Corp (MTRC), a prime borrower, has seen its Moody's rating cut and still the delays continue. MTRC is currently revolving some old debt, and borrowing to improve current signalling and equipment, but there has not been the borrowing bonanza investors were promised. ''I am losing my patience. I still believe common sense will win out in the end, but it probably won't be in the first quarter,'' Mr Thomas said. He discounted stirrings by the Government, which might have suggested a go-it-alone stance on the airport, as well as political reforms. ''Unilateral Declaration of Independence on the airport? I think that is stupid. The Chinese have to be fully on-board,'' he said. Mr Ferguson foresees a quieter year ahead in the Euro market for Hong Kong corporates. ''I think the Hong Kong dollar market will be more important in 1994, and it may become a floating rate rather than a fixed market,'' he said. ''I think floating rate Hong Kong dollars will be popular.'' A popular theory in the markets is that Euro-convertibles will dry up as the first tier of local corporations issues. As many corporates have tightly held shares, the future dilution overhanging convertible issues is likely to put some firms off, sources say. Another problem is the lack of Moody's or Standard & Poor's ratings. Hong Kong companies, even banks, have shown marked reluctance to allow anyone from outside to have a good look at their assets. Meanwhile, the Hong Kong dollar market is being helped along by the Government, which extended the maturity of exchange-fund bills first by taking over the two-year bond programme, then by lengthening maturities to three years. This has had an enormous impact already. Government paper can be legally shorted, as long as an overall long position in the paper is maintained. Complex hedging and speculation on local interest rates from one night out to three years is now possible. The World Bank based its most recent local issue on the three-year Exchange Fund note price and others from the seven - previously four - tax-free issuers. Mr Ferguson expects 1994 to be the year of the five-year government bond, extending the benchmark further and creating new options for arbitrage. ''Five-year paper will be the key to improved liquidity in the secondary market and should also make possible repo deals with stock lending,'' he said. It should also be a competitive year, whether in Hong Kong dollars, Euros and Euro-convertibles or in US dollar dragons. ''The Americans are the ones to watch. There is no doubt that some of them are buying market share. But they are also bringing talent to the markets,'' Mr Ferguson said. He says Wardley will probably be doubling its new issues team from three people to seven, while trading, sales and derivatives staff are also likely to be bumped up. Morgan Stanley also looks set to double up most of its capital-markets teams from three to six or seven. Jardine Fleming - already seen as the ''main competition'' by some of the US newcomers - is also believed to be gearing up. It has had a good year, particularly around the region, but the US banks have the locals firmly in their sights. ''They definitely have the name in Hong Kong and in some of the other local markets,'' said a source at a US investment house. ''But we have the reach, global placing power.'' Rumours in the market persist - unconfirmed but undenied - that Goldman Sachs is likely to add well over 100 staff to its local payroll. Union Bank of Switzerland lured Paul Smith and most of his team away from ANZ McCaughlin, and his squad has been very active all over the market, especially in trading government paper. ''His team are making out like bandits,'' one source said. That team will also likely grow further. This could mean serious trouble ahead at 1994's bonus round. Rumours have been traversing the globe about the size of this year's giveaway, and while Goldman Sachs has been reported as dishing out US$5 million bonuses to some superstars in New York and London, things are quickly catching up in Hong Kong. ''To get a big bonus, everything has to have gone right,'' Mr Ferguson said. ''The firm must have made lots of money, your department must have made lots of money and you must have had a very good year personally. If all three come up at once, like the jackpot on a fruit machine, you've won big. ''If you and your department have fantastic years but the company doesn't perform, forget the big figures.'' The lucky ones will have got more than half a year's extra salary apiece and a very lucky few will have got more than a whole year's pay.