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Hunting for yield among local bonds

For emerging-market bond investors in the know, the former Soviet Union - especially central Asia - is the place to be. Debt markets have rallied across the board, yields are mostly buoyant, and currencies have held their own against the dollar. But title and settlement can sometimes be a little hairy. Theodore Kim investigates the excitement.

Flights to Kazakhstan, Uzbekistan, Moldova, and Kyrgyzstan used to be sparsely filled by mining engineers or backpacking tourists. Since the start of this year, the passengers have been just as likely to include hedge fund analysts in red braces checking out what they have identified as the next hot opportunity in emerging markets.

Their attention has shifted from eastern Europe, where fixed-income yields have been narrowing across almost all the region's debt markets. Even Russian GKOs, one of the world's best-kept secrets last year when their yields topped 200%, now pay under 20% in rouble terms. Dollar-hedged GKO structured products - which take care of currency, custody, clearing and foreign ownership restrictions all in one - are barely showing a double-digit yield. Bulgarian T-bills and zunk bonds, the best performers in the emerging-market universe in the second quarter of 1997, are now so over-priced that some speculators have begun to short-sell them. So the party is moving on to countries that would send most traders searching for a post-Soviet atlas.

A strong indication of the trend came in June, when Hong Kong-based Regent Pacific, which has a record of digging up hidden lucrative investments ahead of the pack, successfully launched a $70 million Central Asia Fund.

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