* Interest rate swaps paid in Asia as equities rally
* Singapore GDP, Australian confidence index raise optimism
* New Zealand shrugs off Bollard, China swaps higher
By Vidya Ranganathan
SINGAPORE, July 14 (Reuters) - Asian interest rate swaps rose on Tuesday in step with a rally in equity markets driven by an upbeat outlook for U.S. financial sector earnings this week as well as some pointers to economic recovery in Asia.
One-year swaps in Singapore and Hong Kong rose by 4 basis points each, with the former hitting 1.2 percent.
Mimicking Wall Street where analyst reports for better financial sector earnings pushed up stocks overnight, Asian stock markets rose, with indices in Hong Kong and Japan up more than 2 percent.
Singapore's better-than-expected second-quarter economic output data and an uptick in Australia's NAB confidence index furthered that optimism that caused rate markets to sell off.
"The Singapore GDP numbers confirmed the relative optimism about growth in the region," said UBS strategist Ju Wang.
"More importantly, rates had come down quite a lot in the region so it wouldn't be surprising to see that when stocks go up relatively on a day like this, you should see rates going higher."
Indeed, the one-year Singapore interest rate swap had hit its lowest since November on Monday after having fallen since late June as equity markets fell, doubts arose about how fast the global economy would recover from the crisis and monetary tightening seemed a distant prospect.
China's onshore swaps were more volatile, with 10-year swaps showing a rise of between 5 and 20 bps. There, traders said, the paying interest had more to do with tightening monetary conditions owing to the central bank's attempts to rein in bank lending.
Interbank repo rates in China have been rising in line with the steady uptrend in rates at central bank auctions, with 7-day repo hitting 1.5 percent on Tuesday.
The People's Bank of China let the rates on its short-term bond repo operations rise for a third straight week, suggesting it is guiding the upward move in short-term money market rates.
The bank drained 80 billion yuan ($11.71 billion) via 28-day repos at a rate of 1.05 percent on Tuesday, up from 1.00 percent on the same operations conducted last week.
NEW ZEALAND RATES
In Australia, NAB's business conditions index jumped to its best level in 9 months.
The bearishness in the rates market following that data pushed one-year yields up 10 bps to 3.255 percent and appeared to have affected the New Zealand market more so than comments from Reserve Bank of New Zealand Governor Alan Bollard on the economy.
Bollard said he expected the New Zealand economy to emerge from recession earlier than other countries, that monetary easing had been sufficient and that the economy needed a weaker currency.
Three-month bill yields in New Zealand moved up by 1 bps to 2.84 percent. But yields at an auction of 3-month bills were 2.71 percent, 6 bps higher than at a similar auction a week ago.
Khoon Goh, a senior markets strategist at ANZ-National Bank, said Bollard's remarks were not new.
"We saw a big sell-off in the Australian rates market, and that subsequently had an impact on the New Zealand market as well," said Goh. "We've seen the curve steepen"
"Bollard's comments were a reiteration of earlier comments and obviously they want to see the economy rebalance.
"But the markets are largely expecting no further moves to interest rates and hikes to start next year."
Goh expects RBNZ to raise its 2.5 percent policy rate only in late 2010, but he said the market had priced in the first rate rise in March 2010. (Editing by Kazunori Takada)