Top Korea Bond Funds Boost Company Holdings Betting Growth to Trump Crisis

South Korea’s biggest bond buyers are switching to corporate notes after the yield on sovereign debt dropped below inflation, betting economic growth will trump concerns about aggression from North Korea.

Samsung Asset Management Co., which oversees 97 trillion won ($83 billion) and the largest debt fund, is increasing company holdings after the yield on the benchmark 3.75 percent sovereign bond due June 2013 fell to a record low 3.05 percent last month, according to Chief Investment Officer Eugene Kim. Money managers at Kyobo Life Insurance Co. and KDB Asset Management Co. say they’re doing the same since inflation accelerated to a 20-month high of 4.1 percent.

“Investors, including us, are shifting their attention to top-rated corporate and state-run company notes because government bonds won’t guarantee targeted returns,” said Eugene E.S. Chung, who oversees about 25 trillion won in local-currency assets as head of investment management at Kyobo Life, South Korea’s third-largest life insurer by assets. North Korea’s attack yesterday won’t cause that strategy to change “as the development is not expected to damage South Korea’s economic fundamentals significantly,” he said.

South Korea scrambled fighter jets after North Korea fired artillery shells at an island near their disputed border in the communist nation’s worst attack in at least eight months. While some Asian stocks extended a selloff, Moody’s Investors Service said today the credit rating of one of the region’s fastest- growing economies won’t be affected, and the Finance Ministry pledged to supply “ample” liquidity to keep markets stable.

Economic Growth

South Korea’s economy will probably expand 6 percent this year, Finance Minister Yoon Jeung Hyun said Oct. 28, more than an earlier projection of 5.8 percent. Exports, which account for about half the economy, grew for the 11th straight month in September.

The yield on the government’s benchmark three-year bonds rose four basis points to 3.4 percent today. The won weakened 1 percent to 1,148.65 per dollar, after earlier touching 1,172.50, the lowest since Sept. 9.

“Our investment stance remains the same since the current development is not expected to cause a spike in Treasury yields or a dramatic surge in credit spreads,” Samsung’s Kim, who is switching to top-grade company notes from sovereign debt, said by phone today. The attack won’t hurt the fundamentals of South Korea’s economy in the long-term, he said.

‘Geopolitical Risks’

KDB Asset, a unit of Korea’s largest state-run banking group, will raise the corporate weighting in its holdings to about 40 percent from 30 percent, head of fixed-income Kim Hyung Ki said last month.

“We’ll continue to increase corporate bond holdings since the bond market looks unscathed by the geopolitical risks,” KDB’s Kim said by phone today.

The cost of insuring South Korean government debt from default rose 3 basis points to 107.5 basis points as of 9:10 a.m. in Seoul, according to Royal Bank of Scotland Group Plc.

“We’re considering trimming the allocation of bonds with a maturity of five years and longer, since overseas investors may sell some of the notes on concern over country risks,” Samsung’s Kim said.

Three-year corporate bonds rated AA and A yield 4.04 percent and 4.39 percent, according to the Korea Financial Investment Association. The premium investors demand to own A rated three-year company debt instead of government bonds narrowed 30 basis points to 97 basis points since July 1, association data show.

Kepco, Lotte

The spread on state-run Korea Electric Power Corp.’s 190 billion won of 4.22 percent bonds due in September 2013 narrowed to 31 basis points from 55 basis points in the same period, according to Korea Bond Pricing. Lotte Shopping Co.’s 200 billion won in three-year, AA+ rated bonds narrowed 38 basis points to 39.

Companies seized on falling benchmark borrowing costs to sell 18.5 trillion won of local-currency bonds since July 1, the most in a similar period since at least 1999, according to data compiled by Bloomberg.

Tensions with nuclear-armed North Korea have risen this year following the sinking of a South Korean warship in March that the U.S. and its allies blamed on a torpedo attack. President Barack Obama dispatched his special envoy to Pyongyang, Stephen Bosworth, to Asian capitals this week after reports by a U.S. scientist that North Korea had revealed to him a “stunning” new uranium-enrichment plant.

Moody’s View

Moody’s rates South Korea’s foreign and local currency long-term debt A1, the fifth-highest of 10 investment-grade levels. The outlook on the rating is “stable,” Thomas Byrne, senior vice president of Moody’s, said in an e-mailed statement.

Hwang Kwang Sook, a credit analyst at Dongbu Securities Co. in Seoul, recommended the bonds of 17 companies including Kia Motors Corp., Samsung Card Co. and Hyundai Mobis last month, citing the possibility of credit rating upgrades and tightening of their bond spreads.

Kia Motors, rated the lowest investment grade of Baa3 by Moody’s and one rung higher at BBB by Standard & Poor’s, has 60 billion won of 8.6 percent bonds due in January 2012, according to Bloomberg data. The spread on the securities narrowed to 58 basis points from 89 this half, according to Korea Bond Pricing.

Bond Tax

South Korea said Nov. 18 it plans to revive a tax on foreigners’ holdings of sovereign and central bank bonds, joining emerging-market nations from Thailand to Brazil in attempting to slow capital inflows that are driving up their currencies.

Once the tax is re-imposed, which the government has said may happen by Jan. 1, “foreign investors will likely increase the allocation of state-run company and bank notes,” said Louis Shin, a credit analyst at Woori Investment & Securities Co. in Seoul. They’ll then “move onto higher-rated corporate bonds in the longer term for higher yields,” he said.

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

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.