THE Wardley Hong Kong Bond Index rebounded in July after four months' of consecutive declines, indicating a gradual absorption of the interest rate rise shock. The index rose to 97.34 on July 29, up from 96.36 on June 30, riding on the stabilisation of interest rate levels and bond prices in the US and Hong Kong markets. ''Much of the present volatility in the bond market centres on the long-dated bonds, with the short-end ones remaining relatively stable,'' said Andrew Fung, manager of swaps and trading in HSBC Markets. Because the weighted maturity of the bonds included in the index is 3.82 years, the rising index fully reflected the stability on the short-end side. ''With turnover remaining lacklustre, sporadic bargain-hunting by individual fund managers helped support the Hong Kong dollar bond prices,'' he said. Meanwhile, trading activities in the Exchange Fund bills and notes led to narrowing interest differentials between US and Hong Kong rates in two-year and three-year maturities. The usual 10-basis-point difference between the two-year bond and US Treasury bonds of the same maturity vanished, because of active trading by market-makers. ''The two-year bonds are trading at par or sometimes at a discount to the US Treasury bonds,'' said Mr Fung. The interest differential on the three-year bond was substantially squeezed from the normally 60 basis points to 30 basis points. Hong Kong dollar bonds are usually traded at a premium to US Treasury bonds of the same maturity, largely because the Hong Kong dollar is considered a soft currency. Looking ahead, because the short-end bond market has fully priced the rate increase factor following the last rate increase in May, Mr Fung expected the bond market to remain stable in July. In July, Sociedade do Aeroporto International de Macau (CAM) 9.10 per cent 2001 was added to the Index, bringing to 35 the number of Hong Kong Bonds covered. The Wardley Hong Kong Bond Index was launched on December 1, 1993 and corresponds to 100 on the index. The current market weighted yield of the portfolio is 7.54 per cent.