* Yield curves in Asia, U.S. steepen a bit more
* Equity rally stops traders from receiving overpriced yields
* South Korea GDP as expected, rate rises priced in
By Vidya Ranganathan
SINGAPORE, July 24 (Reuters) - As equity markets stormed higher on Friday, Asian debt market curves steepened and market participants hesitated to position themselves against what appeared to be increasingly irrational pricing of near-term monetary tightening in some countries
South Korea was a case in point.
Data on Friday showed the economy expanded at its fastest pace in 5-½ years in the second quarter, but the number was barely a surprise for analysts who had expected that sort of recovery and that growth was driven by government spending.
Analysts said any talk of South Korean authorities exiting their loose monetary settings was premature and rate rises would some slowly.
But that did not stop the aggressive market pricing for rate rises.
The spread between two- and one-year interest rate swaps
The moves were similar to those in dollar markets as well as other interest rate markets in Asia, where stocks hit a 10-month high.
Hong Kong's HIBOR
Forward starting swaps in Hong Kong for instance
<0#HKDFSSM> show the one-year swap rate climbing to 1.62
percent at the end of 12 months. That is from current levels
The spread between two-year and one-year dollar interest
rate swaps
In Korea, the spread between the 2 percent policy rate and one-year bonds widened to 216 bps, nearing the June high of 230 -- which was its highest in years.
Korean won forward starting swaps were pricing in between 2 to 3 rate rises over the next 12 months, said Woon Khien Chia, a strategist with Royal Bank of Scotland.
RBS economists believe that while Friday's data could reduce the odds of further rate cuts in Korea, a rise in rates remained a distant prospect given that unemployment was climbing and economic growth was driven mainly by fiscal stimulus.
"Markets will always try to pre-empt the first rate hike," said Chia.
But the buoyancy in equity markets and the heavy positioning in the front end of the market made it risky to bet rates will come down, that monetary tightening had been priced too aggressively, she said.
"It is not a safe trade if central banks have started considering exit strategies," she said, referring to trades involving receiving of forward starting swaps.
The same was true in most other markets, traders said,
pointing to Australian dollar overnight indexed swaps
"You would expect the bias to be towards the tightening of policy but in the current kind of bull market we have been in in equities, the risk is that the market gets a little bit ahead of itself and starts pricing more aggressively for rate hikes," said another analyst in Singapore.
LIBORs meanwhile were hovering near record lows.
Three-month Singapore interbank dollars
The spread between the 3-month LIBOR and overnight indexed swaps narrowed to 31 bps, levels last seen late in 2007.
(Editing by Kim Coghill)