BULL and bear markets in interest rates provide different challenges to arrangers, says Oakreed Financial Services deputy managing director Mike Lai. Last year, the problem was finding corporate swap partners to satisfy the needs of fixed-rate issuers seeking floating interest rates. With expectations of lower rates last year, corporate treasurers tended to hold off their decisions to enter swap transactions. ''Now, in a bear market, there is no problem finding issuers or swap partners, but there is a problem with investors holding out for a higher yield,'' Mr Lai said. ''Last year, there was virtually no loose paper in the secondary market. Now, there is a lot of paper all along the yield curve. ''Investors are sitting on the sidelines. Most other houses are now sitting on large positions and waiting for the market to digest [the available paper] before they bump up supply again.'' Oakreed topped the league table for fixed-rate Hong Kong-dollar issues last year with 26 issues raising $2.19 billion, according to figures supplied by the company. High activity could mean bigger losses when the market turned, but Mr Lai said Oakreed had seen the turn coming. ''We had 25 issues up to September and we only did one in the three months from October to December,'' he said. ''We predicted a very big correction and we were gradually liquidating portfolios and advised clients against taking paper. We had a very negative view but we were a bit too early.'' Near the peak of the market, there was a three-year issue with a coupon of less than five per cent. ''Three months later - today - you could bring a very superior AAA bank paper to market at around 7.25 per cent. That is the extent of the correction - as much as 250 basis points. It is clearly over done,'' he said. Mr Lai said he expected local banks to continue to tap the floating-rate market to tidy up their balance sheets. ''Other things being equal, this trend may continue unless there is a dramatic cool down in the Hong Kong economy or a downturn in Hong Kong dollar lending activity.'' Hong Kong banks have, traditionally, had a mismatch between their short-term deposit bases and their longer term mortgage and commercial lending. Last year, many unrated local banks borrowed on the floating market. Mr Lai said he expected the trend towards shorter dated paper would continue this year. Last year, about 42 per cent of issues were for maturities of more than seven years. In the first four months of this year, the proportion had fallen to 23 per cent. ''Last year, a lot of issues were for longer than five years because long-term investors are very yield driven. So, the maturity gets pushed out to satisfy yield demands. That trend continued until the market peaked in late January this year,'' he said. This year, up until May 2, there had been 49 Hong Kong-dollar fixed-rate issues that raised about $7.7 billion, but few in the industry expect this year to match last year's buoyant performance. Mr Lai said: ''Certainly, in the second quarter, activity will slow down dramatically but over-reaction is a characteristic of the capital market. It all tends to be over done.''
