MONEY MARKETS-Aussie rates extend rise,South Korea eyes supplies

* Aussie rates extend rise after columnist, housing comments

* South Korea CD rates up, swaps up;supplies eyed

By Umesh Desai

HONG KONG, Sept 29 (Reuters) - Australian swaps extended their rise on Tuesday after a prominent central bank watcher said rate hikes were imminent this year, while a warning of a housing bubble also added to the gloom.

In South Korea, the swaps curve flattened and the 3-month certificate of deposit rate continued its relentless rise on growing conviction a rate rise was close at hand.

The South Korean one-year IRS rose 2 basis points to 3.50 percent, a new 9-month high, and the CD rate rose 1 bps to 2.74 percent, its highest since early February.

The curve stayed flat with the spread between the 10-year and the 2-year swap at 55 basis points, down 8 bps from the start of the month. ING Bank expects this to narrow by as much as 37.5 bps over the next six months.

The move followed upbeat economic data, which showed a pick-up in imports and business sentiment at a two-year high. Treasury bonds extended their slide which had begun since Monday after the government unveiled its budget plan for 2010.

December treasury bond futures dropped another 5 ticks to 108.61.

"In Korea, it is difficult for bond investors to be bullish now -- a lot of factors support a bearish outlook at the moment," said Danny Suwanapruti, fixed-income strategist at Standard Chartered Bank.

The finance ministry on Monday proposed a $241.8 billion budget spending plan for next year, up 2.5 percent from this year's original budget but down 3.3 percent from the consolidated version with a supplementary budget. [ID:nSEO225257]

But analysts said it was likely there could be a suplementary budget next year, increasing the risk of more bond sales.

"The supply numbers were slightly on the high side, monetary policy expectations are clearly hawkish and the sale of longer dated bonds in anticipation of foreign demand is also another potentially bearish factor," Suwanapruti said.

AUSTRALIA EYES RATE HIKES

In Australia, one year overnight indexed swaps rose to 4.02 percent from 3.94 percent.

Implied money market rates now are factoring in a one-in-four chance of a rate hike in November, up from one in five on Monday.

Bond futures also eased after columnist Terry McCrann wrote that, absent a shock, the Reserve Bank of Australia (RBA) was almost certain to raise rates by 25 basis points in both November and December.

But analysts said the market was excessively bearish and that the rate increases now priced in could be reversed if retail sales data on Wednesday turned out downbeat.

"We have seen the curve flatten considerably. There is a potential for almost all this to be unwound if we see weak retail sales tomorrow," said Annette Beacher, senior strategist with TD Securities.

"The RBA is more data dependant than the current markets have priced in," she said.

The rate market saw some paying pressure after Anthony Richards, head of economic analysis at the RBA, said mortgage rates may not stay at their current low levels indefinitely and there was a risk housing prices could rise too fast.

But analysts said the market's interpretation of Richards' remarks was inappropriate.

"I find it hard to believe that for supply side issues they will use interest rates, which is an extremely blunt instrument, to fix an increase in house prices," Beacher said. (Reporting by Umesh Desai; Editing by Kim Coghill)