Dec. 24 (Bloomberg) -- U.S. banks including Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley may sell government- guaranteed bonds in Asia next year, tapping growing demand for the region's local-currency debt to bolster their balance sheets.

U.S. financial institutions sold more than $100 billion of government-backed notes in dollars, euros and British pounds since Oct. 14, when the Federal Deposit Insurance Corp. agreed to guarantee their bonds to help them cope with $678 billion of losses and writedowns amid the global credit crunch.

``Banks like Morgan Stanley and Goldman will have to tap Asian currencies because the potential supply is too big for dollars, euros and pounds to take on,'' said Arthur Lau, a fund manager at JF Asset Management Ltd. in Hong Kong, which oversees $128 billion. ``It's a perfect product for insurance companies in Asia. The bonds offer good yield pick-up, high credit ratings, good liquidity and no currency mismatch.''

U.S. banks may be forced to follow European and Australian banks, which lured fund managers to $6.6 billion of government- backed securities in Asia-Pacific since September with yields of as much as double those on sovereign debt, data compiled by Bloomberg show. Sales of FDIC-backed notes maturing in more than a year may reach $450 billion by the end of June, Barclays Capital analysts said on Dec. 9.

Government Guarantees

Citigroup spokesman James Griffiths and Morgan Stanley spokesman Nick Footitt weren't immediately available to comment. Goldman Sachs' Hong Kong-based spokesman Edward Naylor declined to comment.

Royal Bank of Scotland Group Plc, the U.K.'s second-largest bank, on Dec. 19 borrowed A$525 million ($356 million) in the first Australian government-backed bond sale by a foreign lender. Australia & New Zealand Banking Group Ltd. this month sold 35 billion yen ($386 million) of five-year securities priced to pay 1.85 percent, compared with 0.9 percent Japan pays for sovereign notes of similar maturity.

New York-based Goldman Sachs last sold Hong Kong dollar bonds in January with HK$90 million ($12 million) of 10-year notes paying 4.16 percent, Bloomberg data show. Citigroup raised HK$474 million selling 10-year notes in November last year, priced to yield 5.41 percent.

Citigroup's $3.75 billion of 2.875 percent FDIC-guaranteed bonds maturing in 2011 traded at 168 basis points above U.S. Treasuries today, Bank of America Corp. prices show. The notes were priced to yield 188.4 basis points more than government debt when sold on Dec. 2, according to Bloomberg data.

Lehman Bankruptcy

European and Australian financial institutions led by Bank of Ireland Plc and Danske Bank A/S have tapped the yen and Hong Kong dollar bond markets to sell $1.3 billion of government- backed debt since September, Bloomberg data show.

Ireland in September became the first European country to guarantee the deposits and debt of its six largest lenders after Lehman Brothers Holdings Inc.'s bankruptcy decimated bank share prices and drove default risk to a record high.

Asia's local-currency bond sales rose 7.5 percent this year while issuance in the G3 currencies of dollars, euros and yen dropped to the lowest since 2000, falling 13 percent in the U.S. and 5.8 percent in Europe as slowing economic growth crimped demand for credit, Bloomberg data show. Annual trading volumes in Asia's local-currency government and corporate bonds almost tripled from 2002 to $6 trillion last year, according to the Asian Development Bank.

Perfect Conditions

``The traditional G3 market is stretched and would likely remain difficult for some time, while funds in the Asian domestic markets still have a lot of money that needs to be put to work,'' said Clifford Lee, head of fixed income at DBS Group Holdings Ltd. in Singapore. ``The setting is perfect for the Asian local- currency market to grow.''

Overseas fund managers almost doubled holdings of Asian bonds between 2003 and 2006 to $197.47 billion, Asian Development Bank data show.

DBS Group's S$1.5 billion ($1 billion) perpetual bond sale in May attracted more than 70 investors, compared with an average of about 20 investors for pre-2007 sales, Lee said.

Investments in Asian currency bonds returned as much as 21 percent this year, according to an HSBC Local Bond Index. Asian banks' dollar notes lost investors 16 percent after earning 3.2 percent in 2007, according to JPMorgan Chase & Co.'s Asia Credit Index. U.S. financial institutions' dollar bonds lost 14 percent, while those of their European peers fell 6 percent, Merrill Lynch & Co. indexes show.

Australian Bonds

The extra yield investors demand above government debt to buy quasi-sovereign and foreign government notes denominated in Australian dollars almost doubled from July to a record 132 basis points on Dec. 12, when Australian government-guaranteed bond sales started in earnest, Merrill data show. A basis point is 0.01 percentage point.

Asian banks, which held fewer investments tied to subprime mortgages and collateralized debt obligations than lenders in Europe and the U.S., had $31 billion of writedowns and losses since the start of 2007. That compares with $678 billion for banks in the Americas and $295 billion for European financial institutions in the same period.

Asian nations have been trying to reduce their reliance on overseas debt by developing local-currency bond markets since companies buckled under billions of dollars of debt in the region's financial crisis a decade ago.

Outstanding overseas debt was equal to 2.4 percent of Indonesia's economy at the end of 2007, down from 5.3 percent in 1997, and in Thailand plunged to 2.7 percent from 11.7 percent, according to Asian Development Bank data. South Korea's overseas debt fell to 11 percent from 16.1 percent.

To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net.

Last Updated: December 24, 2008 01:57 EST