Korea Bond Insurance Drops Most in Asia After Upgrades

Insurance costs on South Korean government bonds are dropping at the fastest rate in Asia after credit-ratings companies upgraded the debt to the highest levels since the 1997 Asian financial crisis.

The price investors pay to protect their holdings of the securities from default for five years declined 31 percent in the past month, with the credit-default swap sliding 35 basis points to 72, according to CMA. The contracts reached a four- year low of 69 on Sept. 14, making them cheaper than Japan for the first time since March 2011.

Standard & Poor’s raised its assessment of the nation to the fifth-highest investment grade of A+ last week, following similar moves by Moody’s Investors Service and Fitch Ratings. South Korea’s debt as a proportion of gross domestic product dropped to 34 percent in 2011 from 35 percent in 2010 and compares with 212 percent in Japan. The government announced 4.6 trillion won ($4.1 billion) in additional spending for this year on Sept. 10 after economic growth slowed to 2.3 percent in the second quarter, the least since 2009.

“Credit-rating upgrades are positive for South Korean bonds and we expect them to spur inflows,” Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd., said in an interview yesterday. “The drop in default risk shows South Korea’s ability to repay its debt has risen, making the nation a less risky investment destination.”

Mizuho Outlook

South Korea’s 10-year government bonds yield 3.10 percent today, more than 1.80 percent for similar-maturity U.S. Treasuries and 1.64 percent on German bunds, according to data compiled by Bloomberg. The Asian nation’s securities returned 6.1 percent this year, the third-best-performance among 10 regional bond markets tracked by HSBC Holdings Plc indexes. Indonesia’s debt gained 7.2 percent and India’s 6.9 percent.

Overseas investors cut ownership of Korean sovereign debt by 2.6 trillion won last month to 86.9 trillion won, paring this year’s increase to 3.9 trillion won, data from the financial regulator shows. The yield on three-year notes fell to 2.74 percent on Sept. 5, while five-year borrowing costs touched 2.82 percent, both record lows. The rates have since climbed to 2.86 percent and 2.93 percent, respectively.

Economic Slowdown

Korea Development Institute, the state funded think-tank, cut its growth forecast for this year to 2.5 percent from 3.6 percent on Sept. 17 and reduced the projection for 2013 to 3.4 percent from 4.1 percent. Policy makers should manage the economy in a conservative manner in preparation for a prolonged period of “low” expansion, according to the organization.

Overseas sales from Asia’s fourth-biggest economy shrank 6.2 percent in August, the sixth monthly decline this year. The Bank of Korea unexpectedly held the benchmark interest rate at 3 percent on Sept. 13, a decision predicted by only one of 16 economists in a Bloomberg News survey. The central bank lowered borrowing costs in July for the first time since 2009.

Mizuho Securities Co. in Tokyo sold South Korean assets because of the deteriorating economic outlook.

“I don’t like South Korea at this moment as the outlook for domestic demand and exports doesn’t seem great,” Tadashi Tsukaguchi, Tokyo-based chief fund manager of the global macro hedge fund at Mizuho, said in an interview yesterday. “For exports, South Korea depends greatly on China which is showing signs of slowing and the currency will probably try to price that in. Yields are also very low already.”

Tsukaguchi declined to be specific as to what Korean assets he’s selling or to say how much he manages.

‘Positive View’

The won reached a six-month high of 1,113.35 per dollar on Sept. 17 and has since weakened 0.3 percent, trading at 1,116.35 as of 1:29 p.m. today in Seoul, data compiled by Bloomberg show. It has appreciated 3.2 percent in 2012, following a loss of 2.3 percent last year.

Fitch Ratings upgraded South Korea’s debt to AA- on Sept. 6, one level higher than Japan and China. The company cited Korea’s continued economic financial stability in a volatile global environment for its decision. Moody’s Investors Service raised its assessment to Aa3 on Aug. 27.

Credit-default swaps on South Korean debt have dropped 99 basis points, or 0.99 percentage point, in 2012 from the year’s high of 171, according to prices from CMA, which is owned by McGraw-Hill Cos. and compiles quotes from dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Manulife Asset Management (Asia), a unit of Canada’s largest insurer overseeing $37 billion in debt, is “overweight” on South Korean government securities, according to Neal Capecci, portfolio manager for fixed income.

“The sovereign-rating upgrade is confirmation of our positive view on South Korea,” Hong Kong-based Capecci said in a Sept. 17 interview. “Growth is slowing in Korea just like everywhere else in the world, but on a relative basis, we’re still confident with the fundamentals of the Korean economy.”

‘Good News’

The difference in yields between South Korea’s 7.125 percent dollar-denominated government bonds due April 2019 and similar-maturity Treasuries narrowed six basis points to 113 basis points this month, according to data compiled by Bloomberg. The spread reached 111 basis points on Aug. 28, the least since January 2011.

“Emerging countries with ratings of A and higher have seen quite good demand, especially this quarter, and the recent upgrade of South Korean debt was a short-term boost and good news for overseas investors,” Hideo Shimomura, chief investor at Mitsubishi UFJ Asset Management Co., overseeing the equivalent of $76 billion in Tokyo, said in an interview last week.

To contact the reporters on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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