Nov. 4 (Bloomberg) -- Investors should buy short-dated Korean bonds as yields are pricing in unrealistic expectations for interest rate increases, according to Samsung Investment Trust Management Co., the country’s largest bond fund manager.

South Korea may not sustain the pace of its economic expansion next year, reducing the possibility of aggressive interest rate hikes, Kim Eugene, who oversees 60 trillion won ($51 billion) in assets as chief investment officer at Samsung Investment, said in an interview in Seoul yesterday.

“Investors can make profits on bets that short-term bond yields will decline in the future as the current levels are seen as too high,” said Kim, who said he’s buying notes with one- and two-year maturities. “South Korea’s economy can lose growth momentum next year as the gain in the local currency and uncertainty about the U.S. economy pose risks.”

Delays to global economic recovery, price instability and higher oil costs pose risks to South Korea’s economy, Finance Minister Yoon Jeung Hyun said Oct. 26 after the Bank of Korea said gross domestic product posted the fastest growth in seven years. It is “premature” to unwind policies introduced to prevent the economy slumping, Yoon said.

Weakening inflation allowed the Bank of Korea to cut its benchmark interest rate to a record-low 2 percent in February and leave borrowing costs unchanged most recently on Oct. 9 to help support the economy. India, South Korea and Indonesia will start raising interest rates from early next year as Asia’s economies show signs of recovery, Goldman Sachs Group Inc. said on Sept. 8.

Sovereign Yields

The yield on one-year Korean government bonds was 3.48 percent yesterday after rising to 3.62 percent on Oct. 8, the highest this year, from 2.64 percent on July 10, Korea Financial Investment Association data show. The won climbed 8.1 percent against the dollar in the third quarter after slumping in 2008.

Companies in the process of reorganization may face credit- rating downgrades or risk default if the economy fails to show sustainable growth, Kim said.

“The Korean government has delayed distressed companies from defaulting with a series of stimulus packages including interest-rate cuts and liquidity injections, while their fundamentals have yet to improve,” he said.

Korea Asset Management Corp., the state agency that buys and sells distressed assets, has said it plans to spend as much as 20 trillion won of taxpayer money this year to help clean bank balance sheets and restructure companies. State-owned Korea Development Bank set up a $1.8 billion fund in October to buy vessels as the government helps local shipping lines cope with a drop in demand from the global recession.

Samsung Investment’s bond fund is country’s biggest, according to the Korea Financial Investment Association. The company is a unit of Samsung Securities Co., Bloomberg data show.

To contact the reporter on this story: Jungmin Hong in Seoul at jhong47@bloomberg.net

Last Updated: November 4, 2009 00:14 EST