Korea’s dollar bonds are among the developing world’s best performers and investors including Union Investment Privatfonds GmbH and Pacific Asset Management Group predict more gains as funds flee the emerging-market rout.
The 3.875 percent sovereign note maturing in September 2023 has returned 2.3 percent this year through Feb. 14, according to data compiled by Bloomberg. That compares with an average 0.2 percent gain in emerging-market government bonds, JPMorgan Chase & Co. indexes show. A 6.5 percent advance since September trailed only Indonesia’s 2019 Islamic debt among new Asian sovereign issues in 2013, according to Bloomberg data.
South Korea’s record $70.7 billion current-account surplus and the fastest economic expansion in two years are helping make debt sold by President Park Geun Hye’s government a haven for investors fleeing developing-nation stocks and currencies, off to their worst start to a year since 2010. Growth will probably slow this year in India, Indonesia, Turkey and Brazil, among nations dubbed the “fragile five” by Morgan Stanley, according to analyst forecasts compiled by Bloomberg News.
“Credits that have stronger metrics are preferred to the fragile five,” said Sergey Dergachev, a senior money manager in Frankfurt at Union who owns Korean and Indonesian debt among $9 billion of emerging-market assets. “Korea is an ideal candidate to hold in such a volatile and muddle-through scenario in emerging markets.”
South Korea raised $1 billion from the sale of 2023 notes in September, attracting five times that amount in orders. The government sold $1.5 billion each of five- and 10-year bonds prior to that in 2009. Malvern, Pennsylvania-based Vanguard Group Inc. and the New York-based Teachers Insurance & Annuity Association of America are among the biggest investors in the new debt.
Asia’s fourth-largest economy grew 3.9 percent last quarter, the fastest pace since the first three months of 2011, the Bank of Korea said on Jan. 23. Foreign-exchange reserves climbed to a record $348.4 billion in January, when inflation was 1.1 percent after averaging 1.3 percent in 2013.
“We like the outlook for South Korea given improving growth, coupled with benign inflation,” said David Weismiller, who oversees investment-grade bond investments at Newport Beach, California-based Pacific Asset Management. His firm manages $4.5 billion, including Korea’s 2023 notes. “We currently like the value relative to Treasuries or high-quality corporate debt.”
As the U.S. Federal Reserve pushes ahead with its reduction of bond purchases, about $29.7 billion exited funds dedicated to emerging-market stocks and bonds this year through Feb. 12, according to Barclays Plc, which cited data provider EPFR Global, exceeding the $29.2 billion withdrawn in all of 2013. The MSCI Emerging Markets Index has lost 3.8 percent this year while the JPMorgan Emerging Markets Currency Index fell 2.3 percent.
Turkey’s gross domestic product growth is expected to slow to 3 percent this year from 3.9 percent in 2013, while Indonesia’s expansion will ease to 5.3 percent from 5.8 percent, and GDP increases will accelerate only in South Africa among the “fragile five,” according to analyst surveys by Bloomberg.
Morgan Stanley’s strategists came up with that name for the countries because those nations’ governments are finding it increasingly difficult to attract foreign capital to finance trade deficits. South Korea’s growth is forecast to accelerate to 3.5 percent from 2.8 percent last year.
Park’s government hasn’t decided yet whether it will sell more dollar notes in 2014, because it’s still evaluating market demand and setting benchmark costs for local companies, Choi Hee Nam, the director-general of the international finance bureau at the finance ministry, said. Some $2.5 billion of sovereign bonds will mature this year, according to data compiled by Bloomberg.
“We may or may not plan for a global bond sale within this year, nothing has been decided yet,” Choi said in a phone interview in Seoul on Feb. 13. “The purpose of issuing more dollar bonds would be to set a benchmark rate to help local financial institutions to follow.”
Treasury 10-year notes yielded 2.74 percent yesterday, after touching a high this year of 3.05 percent on Jan. 2. The Fed decided to cut its record stimulus by another $10 billion a month to $65 billion at its Jan. 29 policy meeting.
Investors demanded 74 basis points of extra spread over Treasuries to own South Korea’s 2023 notes, versus 115 when the securities were sold, according to Bloomberg data. That compares with an average premium of 218 basis points for investment-grade sovereign bonds across emerging markets, JPMorgan indexes show. A basis point is 0.01 percentage point.
South Korean companies are rushing to take advantage of lower benchmark borrowing costs before the Fed deepens its stimulus cutbacks. Total sales have doubled to $9.025 billion since Dec. 31 compared with the same period a year earlier, according to data compiled by Bloomberg. Companies face a record $42.2 billion of bonds maturing this year.
Fed Chair Janet Yellen said on Feb. 11 only a “notable change in the outlook” for the economy would prompt the U.S. central bank to slow the pace of tapering. South Korea has an A+ sovereign rating from Standard & Poor’s, the fifth-highest score, compared with BBB- for India, the lowest investment grade, and BB+ for Turkey, the highest junk level, according to data compiled by Bloomberg.
“Demand from overseas investors will stay robust which will support domestic issuers in need to increase bond sales,” Lee Jae Hyung, an analyst in Seoul at Tongyang Securities Inc. said by phone on Feb. 14. “Korean bonds are insulated from the selloff because their solid rating offers a safe haven.”
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