(For other news from Reuters ASEAN Summit, click on www.reuters.com/summit/ASEAN14)
SINGAPORE, March 25 (Reuters) - Rising U.S. interest rates and the Federal Reserve winding down economic stimulus mean investors in Southeast Asian bonds must anticipate near-term jitters and increased yields, said the Asia-Pacific head of fixed income at State Street Global Advisors.
Comments by Fed Chair Janet Yellen last week suggesting the U.S. central bank could raise rates sooner than many market participants expect have raised the prospect of capital leaving the region in search of better returns in the United States.
Perennially low U.S. rates had prompted investors to park funds in higher-yielding instruments in emerging economies, such as Indonesia, Malaysia, the Philippines, Thailand, and other members of the Association of Southeast Asian Nations (ASEAN).
ASEAN markets experienced a period of sharp volatility last year as some investors repatriated funds in anticipation of the Fed tapering its U.S. economy-boosting bond-buying programme as a prelude to raising rates. So far this year, ASEAN markets have seen a relative degree of stability.
"If you look at the ASEAN bond markets, yields have come back down. I think now they may have to readjust a bit," Ng Kheng Siang said at the Reuters ASEAN Summit.
Yields, or interest on debt, move conversely with prices.
"If the Fed were to end the taper by end of maybe September or October this year and maybe hike (rates) the middle of next year, I think the market would start to re-price for all markets," Ng said at the summit, held at the Reuters office in Singapore.
This "would likely lead to weakness in all Asian bond markets in general so I would stay light on duration," Ng said, referring to the time until bonds are repaid.
State Street Global Advisors, part of State Street Corp , has around $2.1 trillion in assets under management, with around $5 billion to $10 billion managed out of Singapore. Ng focuses primarily on Asian government bonds denominated in local currencies.
He sees little near-term impetus for most of the region's bond markets to rally much beyond current levels, though is most positive on Thai bonds given the relatively low interest rates.
"Within ASEAN there are not many markets to play with to be on the more bullish side," he said.
Given the possibility of Malaysia and the Philippines raising interest rates this year, Ng said, bonds of those countries are candidates to short - or borrow, sell, and buy back cheaper.
Malaysia may raise rates to slow inflation, which hit a 32-month high in February driven by increases in the prices of food, transport and utilities.
The Philippines could raise rates as soon as the second quarter of this year after the central bank governor said "measured" monetary policy adjustments may be needed even though inflation should stay within target.
In Indonesia, ASEAN's largest economy, the yield on its 10-year benchmark bond fell about 27 basis points over the year to date to 8.17 percent, as investors bought the debt reassured by a strengthening currency and narrowing budget deficit.
Indonesia was dubbed one of the "Fragile Five" economies in late 2013 because of quickly rising prices and a wide current account deficit, but has since managed to address some of those concerns.
Still, with inflation hovering around 8 percent, Ng sees little room for Indonesian bonds to rally further as the central bank is unlikely to lower rates.
"The inflation numbers may stay at the higher end of the range for some time so near term, if there is any kind of relief rally for emerging markets coming back to ASEAN, it will perhaps be fairly limited for Indonesia," Ng said.
However, once the Fed's tightening path becomes clearer, ASEAN as a whole has the potential to outperform other emerging markets.
"Look at the fundamentals of ASEAN, generally they are still quite positive. If you look at for instance the budget situation, it is pretty OK; most of the countries are doing OK apart from Malaysia" which has a wide deficit, he said.
"I would expect some kind of consolidation in the next few months and in the second part of this year we will see some better performance."
Follow Reuters Summits on Twitter @Reuters_Summits (Reporting by Rachel Armstrong, Vidya Ranganathan, Umesh Desai and Jongwoo Cheon; Editing by Christopher Cushing)