Photographer: SeongJoon Cho/Bloomberg

Asia’s Worst Bonds Are Turning a Corner

  • Mirae Asset sees three-year yield falling to record 1.35%
  • Bank of Korea seen cutting benchmark interest rate in July

South Korea’s economy is getting uglier, and that looks like good news for Asia’s worst-performing bond market over the last three months.

Bonds rallied Wednesday in Seoul after reports showed exports contracted for a 17th straight month in May and consumer prices were flat from April. While policy makers left the benchmark interest rate at a record-low 1.5 percent last month, minutes of the Bank of Korea’s May 13 decision showed that one board member called for a rate cut “in near term.” 

Speculation is intensifying that the BOK will cut interest rates next month as Asia’s fourth-largest economy deals with slowing growth and massive restructuring in the shipping and shipbuilding industries. While most economists predict the central bank will stand pat at its June 9 meeting, Mirae Asset Global Investments Co. expects calls for a reduction by more board members to presage a move in July.

“The Bank of Korea will probably cut the rate at least once as part of concerted efforts to boost the economy,” said Yoo Ik Sun, head of investment strategy in Seoul at Shinhan BNP Paribas Asset Management Co., which manages about 36.6 trillion won ($31 billion) of assets. “As economic support measures come out in the second half, outlook on the won would turn less bearish, which would help stoke foreign investors’ appetite for bonds.”

Bond Returns

Won-denominated sovereign notes gained about 0.3 percent in the three months ended May 31, the least in Asia, indexes compiled by Bloomberg show. The yield on benchmark three-year debt rose from a record low of 1.41 percent reached on May 9, to 1.50 percent at the end of last month amid a selloff in emerging-market assets on signs a U.S. rate increase is imminent. It has since dropped to 1.43 percent.

Expectations for a July rate cut will keep the three-year yield from rising above 1.50 percent, according to Ryu Young Jae, the Seoul-based head of fixed income at Samsung Asset Management Co., which oversees 202 trillion won. Dongbu Securities Co. forecasts a 1.42 percent to 1.5 percent range this month, and NH Futures Co. predicts 1.40 percent to 1.55 percent.

‘Capital Gains’

“Capital gains are seen in a country where a rate cut is on the way,” said Choi Jin Young, head of fixed income at Mirae Asset, which oversees 78 trillion won. “If we hear of couple of votes in favor of a rate cut next week, the yield could fall as low as 1.35 percent.”

The outlook for rate cuts saw the won weaken 3.4 percent this quarter, the worst performance in Asia after Malaysia’s ringgit, as the Kospi index of shares retreated 0.5 percent.

While global funds were net sellers of South Korean notes in May, the $5.4 billion of inflows to local bonds this year are only second in Asia to Japan, which has received almost $39 billion. S&P Global Ratings and Fitch Ratings rank the nation’s debt at the fourth-highest investment grade, and Moody’s Investors Service assesses it a notch higher at Aa2, the same level as France.

The yield on the 10-year won-denominated sovereign notes stands at a record low 1.74 percent, and is attractive compared with 0.82 percent in Taiwan and negative rates in Japan and parts of Europe.

“Among Asian countries, South Korea is one of the few nations that are fiscally sound and also offers solid positive yields,” said Choi from Mirae Asset.

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