Korean Investors Snap Up Foreign Structured Notes in Yield Hunt

Sales of structured products in won that are tied to interest rates plunged to the least in five years in Korea as investors eschew record low yields for higher returns offshore.

Won-denominated structured note offerings fell 73 percent to 30 billion won ($27.6 million) in March from February, the lowest since March 2010, while issues denominated in foreign currencies jumped 155 percent to 139 billion won, Korea Securities Depository data show. Three-year corporate bond yields averaged 1.98 percent on April 3 compared with 2.46 percent at the start of the year.

The Bank of Korea joined more than 20 other central banks globally in loosening policy last month, unexpectedly cutting the benchmark interest rate to a record low 1.75 percent. U.S. Federal Reserve Chair Janet Yellen reiterated on March 27 she expects rates to be raised this year. Borrowing costs have been near zero since 2008.

“Korean investors are sensitive to their own domestic rate curve when deciding what they’re going to do with their money,” William Shek, the Hong Kong-based head of rates for Asia Pacific at HSBC Holdings Plc, said by phone. “We’re seeing these investors switch into U.S. dollar products like range accruals as the curve flattens and yields come down after the rate cut.”

Ten-year sovereign bonds yield 2.069 percent compared with 2.645 percent at the start of the year. Benchmark U.S. government securities yield 1.83 percent after touching 1.64 percent on Jan. 30, the least since May 2013.

Life Insurers

A 10-year callable note sold by Commonwealth Bank of Australia on Mar. 27 pays 4.68 percent for each day the 30-year U.S. swap rate is more than the two-year rate and the 10-year rate is less than a certain level, Bloomberg data show. The rate starts from 4 percent and increases to 6 percent by 2022, the data show.

“When the rate was high, Korean investors such as life insurance companies didn’t necessarily have to invest overseas to fulfill their yield target,” Leon Lam, the head of structuring for North Asia ex-Japan, said. “Now, given rates have moderated, they’re more open to looking abroad for alternative investments.”

Most Korean life insurers and in particular the larger ones have less than 10 percent of their total investments in offshore assets, according to Lam.

Investors from other parts of Asia are shifting funds into U.S. dollar-denominated structured notes too, according to Ryan Chan, the co-head of business development at Societe Generale SA’s cross structuring group for Asia ex-Japan.

“With the U.S. entering a rate hike environment and discontinuing its quantitative easing program, the longer end of the yield curve will steepen and it makes a lot of these U.S. rate-based structured notes more attractive,” he said.

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