Western Asset Favors Korean Bonds Amid Global Slump
South Korea’s bonds, upgraded three times since 2006 by Moody’s Investors Service, are gaining appeal as the nation’s fiscal health and growth prospects are better than those of developed economies, according to Western Asset Management Co.
The money manager, which oversees $446 billion globally and is a unit of Baltimore-based Legg Mason Inc. (LM), increased its holdings last month to above the level suggested by the benchmark it tracks and keeps a “constructive” view on the notes, said Chia-Liang Lian, head of investment management for Asia excluding Japan. The won reached an almost 1-year high today and local-currency bond yields touched record lows last week as global investors plowed money into the nation’s assets.
“Compared with other countries’ bonds, like the U.S. and Japan, and given very favorable economic fundamentals, Korea continues to look attractive,” Singapore-based Lian said in a telephone interview on Oct. 12. “With the euro-zone problems and the U.S. fiscal cliff concerns, the universe of high-quality sovereign debt is shrinking. We expect Korea to stand out within Asian bonds as the right candidate for diversification demand.”
South Korea’s sovereign rating was raised to the fourth highest investment grade of Aa3 by Moody’s in August, after which Standard & Poor’s and Fitch Ratings also upgraded the country. The nation’s 10-year debt yields 2.95 percent and that compares with 0.76 percent for similar-maturity bonds in Japan, which is also rated Aa3. The U.S. is rated Aaa at Moody’s and Treasuries due 2022 yield 1.68 percent, according to data compiled by Bloomberg.
Asia’s fourth-largest economy will expand 2.4 percent this year and 3.2 percent in 2013, the central bank forecast on Oct. 11. Growth rates of 2 percent and 1.2 percent are projected for the U.S. and Japan in 2013, according to the median estimates of economists surveyed by Bloomberg. South Korea’s budget surplus is 1.65 percent of its gross domestic product while Japan has a deficit of 10.1 percent and the shortfall in the U.S. is 7.9 percent, according to data compiled by Bloomberg.
The Bank of Korea lowered the seven-day repurchase rate for the second time this year to 2.75 percent on Oct. 11. The central bank will probably leave the benchmark unchanged through 2013, based on the median estimate in a Bloomberg survey.
Korean securities accounted for 16.7 percent of the Western Asset Asian Opportunities Fund as of Aug. 31, according to data compiled by Bloomberg. The fund took advantage of a drop in bond prices in September, when the central bank unexpectedly held off from cutting interest rates, to boost holdings in the nation to “overweight” from “neutral,” Lian said.
“Even if we don’t anticipate the Bank of Korea to further ease monetary policy, we are comfortable with adding exposure in the next three months as, and when, valuations become attractive,” Lian said.
Government bond yields in Korea touched all-time lows on Oct. 10 as investors boosted bets the central bank would cut borrowing costs the following day to support growth. The benchmark three-year yield slid as low as 2.71 percent while 10- year rates fell to 2.91 percent, according to data compiled by Bloomberg.
The won has appreciated 4.1 percent to 1,107.19 per dollar so far in 2012, the third-best performance among Asia’s 11 most- traded currencies, according to data compiled by Bloomberg. It touched 1,106.13 today, the strongest level since Oct.31, 2011.
“Consistent with improving sovereign fundamentals, we expect the won to maintain gradual appreciation,” Lian said.
Gains in Korea’s bonds may be limited as investors unwind bets for further monetary easing, according to Aberdeen Asset Management Plc (ADN), which maintains a “neutral view” on the notes and oversees $300 billion globally.
“I place a 65 percent probability on another rate cut this year and next year is much more uncertain,” Kenneth Akintewe, a Singapore-based fund manager at Aberdeen Asset, wrote in an e- mailed response on Oct. 11.
A decline in geopolitical tensions in the Korean peninsula also supports the country’s assets, according to Western Asset. S&P said in a statement last month that the upgrade in the nation’s sovereign rating reflects reduced risk in the region following a “smooth” leadership change in North Korea.
“Developments over the past year in the Korean peninsula suggest some degree of abatement in geopolitical uncertainty,” Lian said.
To contact the reporter on this story: Jiyeun Lee in Seoul at firstname.lastname@example.org