VIEW-Western Asset upbeat on Asian debt

HONG KONG (Reuters) - Asia's monetary policy flexibility, solid public finances and a young population make the continent's government bonds attractive, said Western Asset's portfolio manager whose fund is overweight in that asset class.

Rajeev De Mello, who oversees $5 billion (3.2 billion pounds) in assets, said his fund's highest overweight rating is on South Korea's government bonds but it is marginally underweight on Malaysian government bonds because its central bank had little room to cut rates.

"Asian countries have a lot going for them in this crisis," he told Reuters in an interview while highlighting the region's relatively low fiscal deficit and its potential to lower interest rates to battle an economic slowdown.

But he also underlined the risks to investing -- a faster than expected slowdown in China's economic growth, a let-up in the easing of the bank funding crisis and the possibility of a policy mistake by authorities across Asia.

De Mello favours some Asian corporate bonds which were trading at cheap levels because of aggressive selling by investors like hedge funds which were liquidating assets to bridge a funding crisis.

"We think the corporate bond markets have priced in way more defaults than what is likely to be the case," he said.

Prices implied a default rate of 54 percent or the possibility that one in two companies would fail to meet its obligation over the next five years.

De Mello said that is higher than the default rates prevailing at the time of the Asian financial crisis of 1997/98 and The Great Depression in the 1930s.

Some debt in China's property sector and Indonesian commodity exporters represented good bets, said the fund manager who has also worked as a trader in metals and foreign currency markets in his 21-year career.