Buy South Korea's Five-Year Bonds as Recovery Loses Steam, Woori Advises

Investors should buy South Korea’s five-year government bonds as reduced issuance by the government and signs the economic recovery is slowing drive prices higher, according to Woori Investment & Securities.

The yield on the securities may drop to 4 percent by the end of this month, a level not seen since January 2009, forecasts Woori, a unit of South Korea’s third-largest financial company by market value. The rate was 4.32 percent on May 4, before yesterday’s public holiday. The government plans to sell 1.65 trillion won ($1.4 billion) of five-year debt this month, down from 2.6 trillion won in April.

“Slowing growth, attractive prices and falling supply will shift demand from short-term bonds to long-term notes,” Peter Park, a fixed-income analyst at Woori in Seoul, said in a phone interview. “The five-year bonds are quite undervalued. I am also optimistic on the outlook for 10- and 20-year bonds.”

The yield on the benchmark 10-year note was 4.86 percent on May 4, down from 5.40 percent at the start of the year, and analysts surveyed by Bloomberg predict it will climb to 4.95 percent this quarter. The rate on the 20-year security has declined to 5.11 percent from 5.62 percent.

South Korea’s economy expanded 1.8 percent in the first quarter from the previous three months and 7.8 percent from a year earlier, the most since 2002, the central bank reported last week. Growth will slow from this quarter as policy makers reel in stimulus and the private sector “remains sluggish,” Park said.

Inflation Risk

“Mid- and long-term bonds will drive yields lower because of the weakening economic momentum,” Park said. “It is still too early to hike rates.”

Mirae Asset Global Investments Co., South Korea’s biggest fund-management firm, predicts government bonds will head lower on inflation concerns before this year’s rally resumes. Consumer prices increased 2.6 percent from a year earlier in April, faster than the previous month’s 2.3 percent rate, official figures show.

“A decline in bond prices for now will be inevitable because inflation keeps rising,” Kim Sung Jin, who oversees 10.7 trillion won ($9.5 billion) of fixed-income assets as head of debt investment at Mirae, said in a telephone interview from Seoul. “But yields are high given Korea’s economic fundamentals; that makes the bonds attractive and will continue to do so in the long-term.”

To contact the reporters on this story: Frances Yoon in Hong Kong at fyoon2@bloomberg.net

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