Pimco to Manulife See Won Bond Gains on Inflows: Korea Markets
Investors dumping emerging market bonds have added $11.5 billion to holdings in South Korea in six straight months of purchases, taking advantage of an improving economy and the region’s best-performing currency.
Pacific Investment Management Co., which oversees the world’s biggest bond fund, expects yields to drop because of low inflation and inflows from global investors. Korean debt is the largest holding in Manulife Asset Management’s Asian fund. Schroder Investment Management Ltd. sees the won appreciating 1.2 percent by the year-end after climbing 2.2 percent this quarter. Emerging-market funds had $44 billion of outflows since the end of May, EPFR Global said on Aug. 23.
“As investors seek to achieve more balanced allocations, there will be interest by foreign investors in emerging local bond markets,” Ramin Toloui, co-head of emerging markets portfolio management at Newport Beach, California-based Pimco, said in an interview in Singapore last week. “This is particularly true in the case of Korea, given its size, importance in the global economy, and high credit quality.”
The won appreciated this quarter as President Park Geun Hye oversaw the region’s only budget surplus, a balance of payments stronger than China’s and the lowest sovereign bond risk outside Japan. Asia’s fourth-largest economy is less vulnerable to the Federal Reserve paring stimulus since it has lower foreign ownership of its debt than Indonesia and Malaysia. Yields on South Korea’s two-year notes rose one basis point, or 0.01 percentage point, this year. Those for Indonesia jumped 319.
“Korean bonds are behaving more like developed markets,” said Neal Capecci, a managing director for fixed income in Hong Kong at Manulife Asset, which oversees $43 billion of bonds in the region. “In the times of stress we are seeing now, some Asian markets are behaving better than others, and Korea is one of the markets that are performing well. Economic fundamentals of Korea are superior.”
Gross domestic product will grow 4 percent next year, the fastest pace since 2010 and accelerate from an estimated 2.8 percent this year, the Bank of Korea forecast in July. Policy makers introduced a 17.3 trillion won ($15.4 billion) supplementary budget and cut the benchmark interest rate by 25 basis points to 2.5 percent in May to aid the economy.
The central bank estimated a record $53 billion current-account surplus and lowered its inflation estimate to 1.7 percent, below its target range of 2.5 percent to 3.5 percent. The won has gained 4.5 percent to 1,113.15 in Seoul today from a one-year low on June 25, as the Indian rupee plunged 5.8 percent and Indonesia’s dropped rupiah 9.5 percent.
Park, whose approval rating reached more than 60 percent according to a poll by the Maeil Business Newspaper this month, faces soaring demand for welfare and record household debt. The government also needs to act swiftly should financial-market volatility rise when the Fed trims its $85 billion in monthly bond purchases, the finance ministry said in an Aug. 21 statement.
“The Korean market could be affected a lot by what’s happening in the U.S.,” said Wee-Ming Ting, head of Asian fixed income in Singapore at Pictet Asset Management, which oversees $28 billion. “U.S. yields are heading higher and that could mean Korean government yields are heading higher.”
The 10-year government yield climbed 88 basis points since April 30 to 3.66 percent. Similar-maturity Treasury yields touched a two-year high of 2.93 percent on Aug. 22 and rose 121 basis points from a five-month low on May 1.
Pimco’s Toloui said weak domestic demand will keep inflation expectations and yields in check. Rajeev De Mello, the Singapore-based head of Asian fixed income at Schroder, said stable global commodity prices will help exporters, while allowing the central bank to leave interest rates unchanged.
“If we see a bit of a recovery in the U.S., as we’ve seen, a bit of a recovery in China as well as the region, Korea will benefit,” said De Mello, who manages $10 billion and expects the won to strengthen past 1,100 per dollar by the year-end and the 10-year yield to fall to around 3.5 percent. “I’m moderately positive on Korean bonds. Institutional investors are still looking to diversify.”
Global investors own 18 percent of the nation’s bond market, compared with 50 percent for Malaysia and 33 percent in Indonesia, according to a July report from JPMorgan Chase & Co. Central banks comprise 41 percent of the holdings, it said, making the won less vulnerable to outflows as the Fed tapers.
The Bank of Thailand has held Korean notes in the past few years, Deputy Governor Pongpen Ruengvirayudh said in an Aug. 16 interview. Norway, which has the world’s biggest sovereign wealth fund, ranked top in the list of net buyers in 2012 with 3.5 trillion won of investment, according to the Financial Supervisory Service in Seoul.
Overseas funds have bought 12.8 trillion won more local debt than they sold in the past six months, the longest run of net purchases since August, 2011, official data show. Franklin Templeton’s global bond fund boosted Korean securities by 11.4 percent in the second quarter to 11.65 trillion won, or 15.4 percent of its assets, its biggest country allocation, data compiled by Bloomberg show. Templeton officials weren’t available to comment, said Mae Loon, a spokeswoman in Singapore.
“In the face of the tapering outlook, Korean bonds and the won are likely to outperform countries such as Indonesia, India and Malaysia,” said Capecci at Manulife. “The bond market itself is more liquid, the currency is less volatile and the investor base is more committed.”
The Korean debt market, Asia’s third-biggest, was valued at $1.4 trillion as June 30 and is the region’s second most active, according to the Asian Development Bank. A measure of liquidity, the ratio of government bonds traded in March to the amount of notes outstanding, was 1.09 for Korea, compared with Hong Kong’s 1.55 and Japan’s 1.06, ADB said.
Credit-default swaps insuring the nation’s debt against non-payment dropped six basis points this quarter to 85 after two quarters of increases, according to CMA prices. That compares with 114 for China, whose sovereign debt is rated by Moody’s Investors Service at Aa3, the same as Korea.
Korea’s budget surplus is 1.8 percent of gross domestic product, versus a deficit of 5.9 percent for India and a 4.8 percent shortfall for Malaysia, data compiled by Bloomberg show.
Mirae Asset Global Investments, which oversees $50 billion, has sold Indian and Indonesian debt in the past three months and is waiting for the Fed to taper before buying South Korean notes, according to Will Tseng, a trader in Taipei for the Seoul-based fund manager.
“We would like to wait until September or October to buy,” Tseng said. “The fundamentals support currency strength. For bonds, I’m betting on the government credit. It is a healthy and strong government with a growing economy.”
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