(Bloomberg News) Higher-rated junk bonds in Asian countries where infrastructure spending is fueling growth, such as Indonesia, should offer the best returns in 2011, according to Pacific Investment Management Co.

With Asia's emerging economies forecast to grow quicker than its developed nations, "while you may be constructive on a region or country, individual credit assessment is crucial," Lian Chia-Liang, head of emerging Asia portfolio management for Pimco, manager of the world's biggest bond fund, said in an interview in Singapore. "Ideally we like to invest in markets which reside in a neighborhood of growth."

Indonesia, Southeast Asia's biggest economy, will expand 6.28 percent this year, outpacing the 5.35 percent growth in Singapore and 4.3 percent in South Korea, according to economists' estimates compiled by Bloomberg. President Susilo Bambang Yudhoyono, who targets 6.6 percent average annual growth through the remainder of his term ending in 2014, has pledged to double infrastructure spending to $140 billion.

The nation, with a foreign and local-currency bond rating of Ba1, the highest speculative-grade by Moody's Investors Service, signed an infrastructure agreement worth as much as $24 billion with Japan last month to build projects including a mass rapid transit system for Jakarta and a water plant.

"If Indonesia gets it right I don't see why they can't move back to the investment-grade rating they had in the mid 1990s," Lian said. "A country's rating upgrade tends to have a salutary effect on its quasi-sovereign and corporate bonds. We view Indonesia as an improving credit story."

Adaro Energy

The extra yield investors demand to own Indonesian coal miner PT Adaro Energy's $800 million of 7.625 percent 2019 bonds instead of similar maturity government debt has fallen 32 basis points in the past month to 292 basis points, according to Royal Bank of Scotland Group Plc prices on Bloomberg.

Pimco Advisors LP is the eighth-largest holder of Adaro Energy's debt among companies required to make regulatory filings, Bloomberg data show. Junk debt is rated below Baa3 at Moody's or lower than BBB- at Standard & Poor's and Fitch Ratings.

The spread on Indonesian state utility company PT Perusahaan Listrik Negara's $500 million of 7.875 percent notes maturing 2037 has widened 1 basis point in the same period, RBS prices show.

Relative yields have increased 19 basis points to 277 basis points, or 2.77 percentage points, in the past month across 18 securities, including Listrik Negara's, tracked by HSBC Holdings Plc's Indonesian Dollar Bond Index. That's after the inflation rate rose to a 20-month high in December.

'Differentiation is Key'

"If you have a cautious view on the sovereign, you would be mindful of the potential negative effect on corporate debt issued in the country," said Lian. "We think credit differentiation is key to outperformance this year."

Pimco, a unit of Munich-based insurer Allianz SE, also favors debt of companies with government backing, Lian said.

The Newport Beach, California-based fund manager is the largest holder among those required to make regulatory filings of $650 million of 7.375 percent bonds due July 2020 issued by PT Indosat, Bloomberg data show. Indonesia's second-largest phone operator is a unit of Qatar Telecom QSC, or Qtel, which is controlled by Qatari government entities.

The spread on the notes, rated Ba1, has narrowed 27 basis points in the past month to 250 basis points, RBS prices show.

"The sovereign back-stop provides an extra comfort level," Lian said. "You have to look at the consistency in performance through economic cycles, corporate governance and the track record of the management team. These are factors that are important to consider when assessing corporate credits in emerging Asia."

Fitch Projection

Fitch, which upgraded Indonesia's debt to BB+, the highest junk grade, in January 2010, says the country may achieve an investment-grade rating and see its outlook boosted to positive from stable if it improves infrastructure and sustains growth.

"Indonesia has large infrastructure needs and it's been relatively slow putting in place the legal measures needed," Andrew Colquhoun, head of Asia Pacific sovereigns for Fitch, said in Singapore on Jan. 26. "If we see some progress there, that would be constructive for the sovereign credit."

Pimco's Emerging Asia Bond Fund returned 2.8 percent in the past month, outperforming 98 percent of its peers, according to data compiled by Bloomberg. The $240 billion Total Return Fund, managed by Bill Gross and the world's biggest bond fund, gained 0.9 percent, the data show.