MERS Forgotten Amid Korean October Sales Flags End of Bond Rally

  • 10-year yield to jump 24 basis points this quarter: survey
  • Spending revival seen supporting economy after MERS setback

South Korean money managers are preparing to sell the nation’s bonds as shoppers return to malls amid October sales dubbed the Korea Black Friday.

NH Investment & Securities Co., KB Investment & Securities Co. and Hyundai Securities Co. recommend reducing sovereign debt positions from the middle of this quarter on bets that a recovery in consumption will discourage the Bank of Korea from cutting record-low borrowing costs. The benchmark 10-year yield will climb to 2.30 percent by Dec. 31 from 2.06 percent at the end of September, according to the median estimate of six analysts surveyed by Bloomberg.

Bonds rallied last quarter as a deadly virus outbreak spooked shoppers, worsening the outlook for an economy reeling from a slump in exports. Consumers are returning to stores after the end of the Middle East Respiratory Syndrome that infected at least 186 people and killed 33. The government has cut taxes and is now wooing shoppers with the Korea Black Friday, a two-week version of the festive shopping period in the U.S., with retailers marking down prices by as much as 70 percent from Oct. 1.

‘Domestic Demand’

“Indicators of domestic demand are likely to improve to pre-MERS levels following efforts to spur consumption through the Black Friday sale and tax cuts,” said Park Jong Youn, a fixed-income strategist for NH Investment in Seoul. Park predicts the 10-year will drop as low as 2 percent before climbing to 2.40 percent toward the year-end.

The 10-year bond rose in each of the past three months, the longest rally since a seven-month advance ended last November, with the yield dropping 39 basis points from June 30. It rose one basis point to 20.6 percent as of 10:58 a.m. in Seoul on Tuesday from an unprecedented 2.05 percent on Monday. The notes have handed investors a 3.7 percent return in the past three months, indexes compiled by Bloomberg show, the highest in Asia after India.

Gross domestic product increased 2.2 percent in the second quarter from a year earlier, the least since the first three months of 2013, and the central bank cut its benchmark rate to a historic low of 1.50 percent in June.

‘Gradual Improvement’

Domestic consumption is starting to turn around. Department stores rose 10.9 percent in the Sept. 7 to Sept. 29 period that culminated in a local holiday period known as Chusok, the Finance Ministry said in an Oct. 4 statement. That followed declines of 11.9 percent and 6.5 percent in June and August, respectively. The nation’s retail sales increased in July and August after contracting in May and June, official data show.

“Economic data show gradual improvement, and retail sales for September will be better than expected.” said Park Chong Hoon, an economist at Standard Chartered Bank Korea Ltd. in Seoul. “I don’t think the BOK is keen to add monetary stimulus.”

Standard Chartered’s Park predicts 2.5 percent economic growth in 2015, compared with a median forecast of 2.4 percent in a Bloomberg survey and the central bank’s 2.8 percent estimate. The BOK will keep its policy rate at 1.50 percent this year, according to sixteen of 24 analysts surveyed by Bloomberg. The rest forecast a cut to 1.25 percent this quarter.

Korea Asset Investment Securities Co. said the 10-year yield could drop as low as 1.85 percent this quarter as concerns about the growth outlook, and potential monetary easing by global central banks other than the Federal Reserve, prompt the BOK to ease further.

‘Room for Easing’

“The BOK can lower the interest rate by 25 basis points each this quarter and the next, and that will keep market yields low for longer than expected,” said Kong Dong Rak, a Seoul-based fixed-income analyst at Korea Asset Investment. “Korea has room for more easing, and domestic as well as foreign demand for bonds is huge.”

Finance Minister Choi Kyung Hwan said on Sept. 24 the economy is recovering at close to “normal pace” supported by domestic demand. The government cut consumption tax rates by as much as 30 percent on cars and large home appliances from Aug. 27 until the end of this year.

“Bond investors will keep buying bonds for now due to the weak economic momentum,” said Shin Eol, a fixed-income analyst at Hyundai Securities in Seoul. “But if the BOK doesn’t adjust its interest rate by November, yields will rise and the longer rate will reach as high as 2.35 percent by the end of the year.”

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