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Korea Corporate Yield Premium Set to Rebound, UBS Hana Says

A rally in South Korea’s corporate debt is drawing to an end after yields on the securities fell to the lowest level in five years relative to government bonds, according to UBS Hana Asset Management Co.

The premium investors demand to hold three-year AA bonds instead of similar-maturity sovereign notes was 41 basis points on May 29, down 26 basis points from the start of the year and the lowest since September 2007, according to data compiled by Koscom Corp. The gap widened to 46 basis points on June 18 and may increase a further 20 basis points this year, according to Hwang Jae Hong, who oversees 12 trillion won ($10.4 billion) as head of fixed income at UBS Hana, a Seoul-based joint venture between UBS AG (UBSN) and Hana Financial Group.

“Company bonds gained from October as, with the central bank holding rates, investors didn’t see much opportunity in sovereign bonds,” Hwang said in a June 18 interview in Seoul. “There should now be a technical widening in corporate spreads with investors starting to reap gains, although Korean companies’ fundamentals are still strong.”

Kia Motors Corp., South Korea’s second-largest carmaker, reported a first-quarter profit that beat analyst estimates, and Samsung Electronics Co. (005930) had its highest earnings in at least two years after beating Apple Inc. and Nokia Oyj in smartphone sales. The International Monetary Fund cut its 2012 economic growth forecast for the nation last week to 3.25 percent from 3.5 percent and said the central bank has room to cut interest rates should growth weaken.

Rate Outlook

The Bank of Korea left its benchmark interest rate at 3.25 percent for a 12th month at a June 8 meeting, citing increasing risks to growth stemming from Europe’s debt crisis. Governor Kim Choong Soo said after the policy review that the board discussed “follow-up measures” in preparation for changes in the economic situation, which spurred some investors to bet that the central bank will lower borrowing costs in July.

Hwang forecast the Bank of Korea will keep interest rates unchanged for the rest of this year.

“Conditions for a benchmark-rate cut would be that Europe’s crisis deteriorates, spreading chaos in the financial market and harming the U.S. economy as well,” he said. UBS Hana has had an “overweight” position in corporate bonds for the past year, though there are no plans to boost these holdings further, Hwang said.

Sliding Yields

The average yield on South Korea’s corporate debt rated AA dropped 28 basis points this quarter to 3.76 percent, according to Koscom, which collates price data from Korea Exchange Inc., Korea Financial Investment Association and three credit-rating companies. AA is the third highest of 10 investment grades.

Kia Motors (000270) is rated AA at Korea Investors Service and the yield on its 4.18 percent bonds due November 2017 increased one basis point, or 0.01 percentage point, this month to 3.82 percent as of June 19, according to data compiled by Bloomberg. That followed declines of 18 basis points in May and 19 basis points in April.

“With company note yields approaching record lows and Europe’s debt crisis heightening financial market volatility, South Korea’s corporate spreads will widen for the next couple of months,” Kim Ki Myung, a Seoul-based credit analyst for Korea Investment & Securities Co., the second-biggest underwriter for South Korean corporate bonds this year, said in a phone interview on June 19. “Still, there is plenty of money waiting to invest in these securities for better yields, so the widening of spreads will be limited.”

The yield on South Korea’s benchmark three-year bonds fell 23 basis points this quarter to 3.32 percent on June 20, according to data compiled by Bloomberg. It may rebound to around 3.60 percent this year as speculation eases that the central bank will lower interest rates, according to Hwang.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net; Taejin Park in Seoul at tpark31@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net

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