Nov. 4 (Bloomberg) -- Local-currency government bonds of Indonesia, South Korea and Australia may gain as those three economies recover at a slower pace than investors expect, according to MFC Global Investment Management.

“In Indonesia, for example, we believe we won’t see as much inflation as the market is concerned about,” Endre Pedersen, executive director for Asia fixed-income, said in phone interview from Hong Kong. “Interest rates will drop and the prices on those bonds will rise again.”

Indonesia’s central bank kept interest rates at 6.5 percent today, judging inflation isn’t yet enough of a risk to warrant higher borrowing costs. The current monetary policy direction is still “conducive for the process of economic recovery,” the central bank said, adding that inflation will continue to ease in the medium term.

Inflation in Southeast Asia’s biggest economy unexpectedly slowed to a nine-year low of 2.57 percent in October. Ten-year government bonds are yielding 9.945 percent, down from 10.818 percent in mid-August, according to data compiled by Bloomberg.

“Similarly, the Korean central bank cannot hike interest rates until it is certain the recovery is sustained,” Pedersen said. “This presents a chance for those investors who believe that too much positive news has already been priced into the comparatively high five-year rates, currently at 5 percent.”

Australian Rates

Inflated interest-rate expectations in Australia make the nation’s four-and five-year local-currency government debt attractive, the fund manager said. The notes yield 5.088 percent and 5.218 percent respectively, Bloomberg data show.

Australia’s central bank yesterday raised its benchmark interest rate for a second straight month, to 3.5 percent, and three-month forward contracts show investors expect the rate to climb to 4.9 percent in the next six months. Retail sales slowed in September, dropping 0.2 percent from August, the Bureau of Statistics said in Sydney today.

MFC Global Investment Management, a unit of Manulife Financial Corp., Canada’s largest insurer, had $250 billion in assets under management as at June 30. Of that, $15.8 billion was in Asian fixed-income.

To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

Last Updated: November 4, 2009 05:22 EST