Goldman Warns on Korea Bonds as GS Caltex Shows Demand Still Hot

Investors in Europe and U.S. bought half of GS Caltex Corp.’s dollar bonds this week as Goldman Sachs Group Inc. warns demand from developed markets is making yield premiums on top Korean names too tight.

The Seoul-based oil refiner is paying a 3 percent coupon on its $400 million of notes, the lowest yet for its sales in the U.S. currency, according to data compiled by Bloomberg. Spreads on South Korean dollar bonds average 139 basis points more than Treasuries this year, JPMorgan Chase & Co. indexes show, the least since 2007, before the collapse of Lehman Brothers Holdings Inc. and the global financial crisis.

Developed-market money managers’ search for yield, as well as onshore investor demand, is making Korea’s dollar bonds a less attractive bet, according to a June 12 Goldman Sachs report. Spreads for top-rated non-financial companies are an average 50 basis points more than their U.S. peers, compared with 120 basis points about a year ago, the New York-based investment bank said.

“We see limited upside given the tight spreads,” analysts led by Hong Kong-based Kenneth Ho wrote. “We see better value elsewhere in Asia investment grade, even though we believe search-for-yield motives will likely keep Korean spreads tight.”

Far East Horizon Ltd., part owned by China’s biggest supplier of chemical products, Sinochem Group, is meeting investors from today for a proposed dollar bond sale, people familiar with the matter said, asking not to be identified because the details are private.

Sales Drop

Oversea-Chinese Banking Corp. sold $1 billion of Tier 2 subordinated bonds at 175 basis points more than Treasuries yesterday, while Goodman Hong Kong Logistics Fund borrowed $400 million at a 180 basis-point spread. The issues contributed to the $3.3 billion of sales this week, down 36 percent from the previous five business days, Bloomberg-compiled data show.

The cost of insuring corporate and sovereign bonds against non-payment in the Asia-Pacific region climbed to the highest in a week today, credit-default swap prices show.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan rose 2 basis points to 105 basis points as of 8:34 a.m. in Singapore, Standard Chartered Plc prices show. The gauge is set for its highest close since June 5, according to data provider CMA. On the week, it’s poised for a 3.8 basis-point climb after falling for the past six periods.

The Markit iTraxx Japan index increased 1 basis point to 70 as of 9:42 a.m. in Tokyo, Mizuho Securities Co. prices show. The measure is at its highest level since June 6 and set to rise for a fourth-straight day, the longest series of increases since March 14, CMA data show.

The Markit iTraxx Australia index rose 2 basis points to 83.75 basis points as of 10:30 a.m. in Sydney, National Australia Bank Ltd. prices show. The benchmark, on track for its biggest one-day gain in a week, last closed higher on June 5, CMA data show.

The indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

To contact the reporter on this story: Tanya Angerer in Singapore at tangerer@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net Chris Bourke

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