KB Asset Management Co. said it is increasing holdings of longer-maturity South Korean sovereign bonds on bets the central bank will cut borrowing costs in the first quarter of next year to stave off an economic slowdown.
The unit of KB Financial Group Inc., Korea’s second-largest financial services group by assets, is investing in five- and 10-year debt and expects the Bank of Korea will lower its seven- day repurchase rate to 3 percent from 3.25 percent, Moon Donghoon, who oversees 11 trillion won ($9.7 billion) as managing director of the fixed-income department at KB Asset, said in an interview yesterday.
“Global economic growth will be slow through next year as Europe needs to implement its rescue plan, and as the U.S. tries to reduce its budget deficit,” Moon said. Inflation is cooling in Korea, which will give the central bank more room to lower the benchmark rate, he said.
Consumer prices rose 3.9 percent in October from a year earlier, falling below the Bank of Korea’s target ceiling of 4 percent for the first time this year, central bank data shows. The economy grew 0.7 percent in the third quarter from the second, when it gained 0.9 percent. Inflation will settle at around 3.5 percent next year as the global economic downturn pushes oil and food prices down, Moon said.
The yield on South Korea’s benchmark five-year notes may fall to 3.30 percent in the first three months of 2012 from the current 3.56 percent as the slowing economy drives demand for the securities, Moon said. Ten-year yields may drop more than 30 basis points to below 3.50 percent, he added.
The difference in yields between South Korea’s three- and 10-year sovereign debt narrowed to 37 basis points on Nov. 2, 78 basis points lower than this year’s high in January, according to data compiled by Bloomberg. Yield spreads will continue shrinking through the first quarter, Moon forecast.
South Korea has raised its seven-day repurchase rate by 75 basis points, or 0.75 percentage point, this year, last lifting the rate in June. It next meets to review the rate on Nov. 11.
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