By Patricia Kuo Oct. 23 (Bloomberg) -- Blackstone Group LP, manager of the world's biggest buyout fund, expects Asian bond yields to rise this year as investors struggle with margin calls on their leveraged investments and withdraw cash from money managers. ``Things will likely be cheaper in the first quarter than they are now in Asia because many funds will face redemptions and margin calls,'' Tim Donahue, Asia-Pacific head of Blackstone's $25 billion GSO Capital Partners LP credit hedge fund, said in an interview in Hong Kong yesterday. ``Most probably we'll see redemption notices by mid-November, which will then create another wave of selling pressure.'' The extra yield investors demand to own Asian corporate dollar bonds over U.S. Treasuries more than doubled from the end of August to a record 8.3 percentage points yesterday, according to JPMorgan Chase & Co.'s Asia Credit Index. Standard & Poor's said it expects the default rate for U.S. high-yield, high-risk borrowers to reach 7.6 percent in the next 12 months amid a credit market freeze triggered by subprime mortgage defaults and Lehman Brothers Holdings Inc.'s collapse. Assets managed by hedge funds may shrink to $1.3 trillion within six months from about $1.7 trillion as investors withdraw money on declining returns, according to Credit Suisse Tremont Index LLC. Investors withdrew a record $43 billion from hedge funds last month, TrimTabs Investment Research said Oct. 16. New York-based GSO was started in 2005 by former Credit Suisse executive Bennett Goodman with Donaldson Lufkin & Jenrette colleagues Trip Smith and Douglas Ostrover. It hasn't made any investments in Asia since the Hong Kong office opened in September because U.S. assets still offer better value than Asian debt, Donahue said. Paid To Be Patient ``In this kind environment, we're being paid to be patient in Asia,'' he said. ``There is a complete decoupling of technicals and fundamentals in the convertible and high-yield bond markets in Asia. At current price levels, they are intrinsically cheap but are likely to get cheaper. There are going to be a lot of distressed sellers as the leverage unwind accelerates.'' The debt of Asian companies including Noble Group Ltd., a Hong Kong-based commodity supplier, Korea Development Bank and Hutchison Whampoa Ltd., billionaire Li Ka-shing's biggest company, has fallen as fund managers face increasing difficulty finding buyers for less creditworthy bonds. Noble's $500 million 8.5 percent bonds traded at a record 32 percent yield today after the notes tumbled 55 percent since they were was sold in May, ING Groep NV prices show. Noble is rated one rung below investment grade by Standard & Poor's and Moody's Investors Service. Attractive Discounts Hutchison, rated the seventh-highest investment grade, earlier this month said it bought back debt with a face value of more than HK$2.5 billion ($322 million) at ``attractive discounts.'' The company's 6.25 percent $2 billion bonds maturing 2014 yielded 8.3 percent at 10:27 a.m. in Hong Kong, according to Royal Bank of Scotland Group Plc prices. ``Oddly enough, many of the highest quality names have been hit the hardest because they are the only ones where accounts can find a bid to get liquidity,'' said Donahue. ``Fundamentally, the underlying credits have not changed to the extent their prices would indicate.'' Since Asia's high-yield debt market is dominated by banks and hedge funds instead of long-only investors such as mutual funds, pension funds and insurance companies, U.S. debt prices will probably recover faster than those in Asia, according to Donahue, who joined GSO after nine years with JPMorgan. To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net.

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