FUND VIEW-ING Asia fund arm likes India, Thailand bonds

*Sees a tightening trend for Asian debt spread

*Favours India, South Korea, Malaysia and Thailand debt

*Expects more sovereign debt sales

HONG KONG, Feb 20 - ING Groep NV's <ING.AS> Asian fund arm said it likes bonds from South Korea, Thailand, Malaysia and India, as lower interest rates in these countries would spur demand for their debt.

Asian credit spreads are expected to tighten in the next six months as the U.S. government cuts taxes and raise spending to lift the economy, said Timothy Matson, regional head of fixed income at ING Investment Management for Asia Pacific.

"Clearly, spreads are going to be quite volatile in the tightening trend," Matson said in an interview on Friday. "That's also with the caveat that we don't have some major surprise, that there will be no big companies going bankrupt."

Since the start of this month, spreads have been widening, reversing the tightening trend seen in early January, on disappointment over President Obama's plan to rescue banks, while a slew of grim economic data from the U.S., Europe and Asia sparked fears that the global economy is sinking deeper into recession.

The Asia iTraxx investment-grade index <0#ITAIGMPBMK=> excluding Japan, a key measure of risk aversion, has widened by about 85 basis points so far this month.

The index, which measures 50 high-credit bond spreads in Asia, on Wednesday rose to its highest level in more than two months to 465 basis points, though still well below the 650 peak recorded in late November.

A spate of bad news from South Korea including worries that the country faced a possible foreign exchange crisis in March and Woori Bank's failure to exercise an option to buy back its debt sparked a selloff in Asian bonds in recent sessions.

"In the last week, there's been a lot of noise in the market. There is the Woori Bank issue in Korea, there is that underwhelming response to Obama's stimulus package. So we've seen that the tightening trend of spreads has slowed or reversed somewhat," he said.

"Once these problems get sorted out and people get more comfortable with the stimulus package, then we will see the tightening trend to continue," Matson said.

Seoul has already assured investors that the country has enough currency reserves to meet its maturing obligations this year, while Woori Bank has hired investment banks to help it sort out its debt situation. [ID:nSEO219955] and [ID:nHKG136415]

ING, whose Asia Pacific investment management division overseas$108 billion in client assets, said it's time to buy investment grade credits in the region. The fund arm has invested about $56.5 billion in Asian fixed income.

Helped by slowing inflation rates, most central banks in Asia have sharply reduced interest rates to protect their economies from the global economic slump and make up for slumping exports. Governments have also announced plans to increase spending.

The Bank of Korea has lowered its key rates to record lows, while borrowing costs in Malaysia are at their lowest in over 10 years and those in Thailand are at their cheapest in nearly five years.

India's central bank, which has reduced rates by 350 basis points since October, still has room to cut them further, its central bank chief said on Wednesday. [ID:nBOM149009]

Malaysia is preparing to launch a second stimulus package that is bigger than the previous $2 billion to support the economy. That may cause its budget deficit to rise to 5.7 percent of GDP, according to Fitch Ratings, much higher than the government's target of 4.8 percent. [ID:nKLR371306]

While lower rates are welcome news for bond investors, the expected rise in spending, budget gap and borrowings are not.

"The thing we are concerned about is that there is a lot of government issuance and the fiscal positions of these countries are deteriorating," Matson said.

So far this year, only the Philippines government has tapped the international bond market, raising $1.5 billion in January. Indonesia is expected to follow soon, after the government met with investors in the U.S., Europe and Asia earlier this month to drumbeat interest on its planned medium-term debt.

But even with the projected bigger deficit and more funding needs, credit ratings of most Asian countries would be maintained, Matson said. In contrast, companies, particularly exporters, may see their credit ratings suffer.

"In the credit space, there will probably be some downgrades because companies are experiencing declines in earnings. And particularly, some export driven companies, their credit ratings will suffer because their earnings will suffer," Matson said.

"Sovereigns we think are probably okay. Obviously, they are putting on more debt at this point but certainly their fiscal situations and most their current accounts are dramatically better than they were during the Asian financial crisis," he added.