Citigroup Favors Debt as Real Yield Lures Western: Korea Markets
After adjusting for a 0.7 percent gain in consumer prices, the least in the region, the nation’s benchmark 10-year notes paid 2.75 percent as of Nov. 1, the highest since 2009, data compiled by Bloomberg show. That compares with the so-called real yield of 2.44 percent on Thai securities, ranked second.
Benign inflation (KOCPIYOY) has enabled central bank Governor Kim Choong Soo to keep borrowing costs at a three-year low of 2.5 percent. The won has rallied the most in Asia since the end of June as exports climbed to a record and the Federal Reserve delayed tapering stimulus that has boosted emerging markets.
“From a relative value perspective, the Korean curve is still attractive,” Kim Wontae, a Singapore-based analyst at Western Asset, said in a Nov. 1 interview. “The likelihood of a U.S. taper in 2013 has greatly diminished and there is value to be had in the Korean sovereign bonds. Fundamentals will take root, making Korea an attractive option.”
Inflation last month was at the lowest level since Feb. 1999 and hasn’t exceeded 2 percent in a year. October’s exports jumped 7.3 percent from a year earlier to a record $50.5 billion, latest official data show. The Bank of Korea predicted on Oct. 29 that the nation’s current account surplus will reach an all-time high of $63 billion in 2013.
Asia’s fourth-largest economy grew 3.3 percent last quarter from a year earlier, the fastest pace since the final three months of 2011, central bank data show. The won strengthened 7.5 percent this half and fell 0.1 percent to 1,061.75 per dollar today in Seoul.
“The improving growth dynamic will likely foster new portfolio inflows,” Danny Suwanapruti, an analyst at Standard Chartered in Singapore, wrote in an Oct. 24 research note. The bank recommends buying three-year local currency bonds as it expects South Korea’s monetary policy to remain stable and anticipates strong demand for its debt from foreign and local investors, according to the report.
The 10-year yield has declined 25 basis points to 3.49 percent as of today from a 15-month high reached Aug. 19, while the three-year yield dropped 12 basis points in the period to 2.87 percent. Standard Chartered predicts the three-year yield will decline to 2.7 percent, without specifying a timeframe.
Local demand for bonds will be supported by the nation’s growing ranks of retirees, driving longer-dated yields lower, Gaurav Garg, a Citigroup strategist in Singapore, wrote in an Oct. 24 report.
South Korea’s population is aging at the fastest pace among advanced nations, according to the Organization for Economic Cooperation and Development. Statistics Korea estimates that by 2026, one of five citizens will be aged 65 or older, a level the U.S. won’t reach until a decade later.
“We expect rates to remain low over the medium to long term,” Garg wrote. “The aging demographics and demand for duration from domestic investors are prominent anchors for long term rates.”
Meritz Securities Co., which oversees $7 billion of assets, prefers stocks and real estate over government debt because it expects yields to rise once the Fed starts tapering its $85 billion of monthly bond purchases, according to Park Sungjin, the company’s Seoul-based head of asset management.
“When tapering starts, it could hurt cash flow into Korea,” Park said in an Oct. 25 telephone interview. He favors two-year notes over those maturing in a decade, predicting South Korea’s economic recovery will push 10-year yields to 3.7 percent in six months.
Economists expect the Fed to delay the first reduction in its bond-buying program until March, according to the median estimate of economists in a Bloomberg News survey conducted Oct. 17-18, after the U.S. government ended a 16-day shutdown.
The Fed maintained its stimulus on Oct. 30, noting the world’s largest economy is showing signs of “underlying strength.” The yield on 10-year U.S. Treasuries slid to 2.62 percent as of 10:33 a.m. in Singapore from a two-year high of 2.99 percent on Sept. 5, data compiled by Bloomberg show.
Geoff Kendrick, Morgan Stanley’s head of Asian currencies and rates strategy in Hong Kong, predicts overseas ownership of South Korea’s debt will grow as foreign monetary authorities and sovereign wealth funds increase holdings. Non-residents hold 15 percent of the nation’s government debt and 22 percent of the BOK’s bonds, he wrote in an Oct. 17 report.
“We could see money flowing to Korean bonds should U.S. yields decline further,” said Park Taeshin, a currency and fixed-income trader at Societe Generale SA in Seoul. “It’s undeniable that Asia’s highest real yield merits buying.”