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(Adds investor comment, Moody's statement)
By Karin Strohecker and Umesh Desai
LONDON/HONG KONG, Feb 20 (Reuters) - Mongolian bonds rallied on Monday after a $5.5 billion loan package agreed on the weekend staved off default and rewarded investors who had hung on despite signs of mounting stress.
Investors had been particularly concerned about a $580 million repayment due March 21 on a bond issued by state-run Development Bank of Mongolia (DBM). The country's lawmakers had appealed for donations from local businesses and citizens to help the cash-strapped government pay creditors.
That bond, which the government hopes to soon swap for a new one, rallied as much as 2 cents in price on Monday . Issues maturing 2018, 2021 and 2022 rose 1.1 cent, 3.9 cents and 4.2 cents respectively, ,, according to Tradeweb data.
"I have been long Mongolia for a long time - this is very good," said Shahzad Hasan, a portfolio manager for emerging markets fixed income at Allianz Global Investors.
"This will invite foreign investment in the country, especially in the mining sector, and it will improve confidence of foreign investors in Mongolia, so it is all very positive and very constructive."
Mongolia will meet this week with foreign investors to see if it can swap the DBM bond for another state-guaranteed issue.
Depending on exchange offer terms, such as swap could be classed as a default, Moody's warned on Monday, just days after putting Mongolia on review for a ratings downgrade because of the possibility of a DBM default. However, the bailout could help Mongolia's credit profile, it added.
The loan agreement for the mineral-rich country includes $440 million from the International Monetary Fund, $3 billion from the World Bank and others, as well as a 15 billion-yuan swap line extension from China.
Mongolia was seen by many as a classic case of the "resource curse". It enjoyed double-digit annual growth over 2011-2013, but its boom went into reverse amid government over-spending and falling commodity prices.
However, investors largely kept faith with its bonds, betting either the IMF or China, the biggest buyer of Mongolian coal and metals, would come to the rescue.
The country's mineral wealth was also a lure for longer-term investors, especially as the Rio Tinto-led Oyu Tolgoi project is expected to produce 560,000 tonnes of copper annually from 2025.
"The IMF program, along with the broader bailout package ... should go a long way towards restoring investor confidence in the sovereign," analysts at Nomura told clients.
The IMF expects Mongolia's economic growth to accelerate to around 8 percent by 2019, Nomura noted, compared with last year's 1 percent, which was a seven-year low. Hard currency reserves should almost quadruple from current levels to $3.8 billion, back to the boom days of 2012.
"Eight percent growth is quite strong - but it can happen if the mining comes online and copper prices have rebounded," Hasan said.
Economic stabilisation after the bailout should also pave the way for further investments into Mongolia's mining sector.
"It brings clarity, which investors have been waiting for. It is the bottom-out everyone has been waiting for," said Dale Choi, an analyst with the Mongolia Metals and Mining, a research firm in Ulaanbaatar. (Additional reporting by Sujata Rao and Marc Jones in London, editing by Larry King)