Korea Selling First Dollar Bonds Since 2009 as Yields ClimbKyoungwha Kim and David Yong
South Korea is selling its first global bonds since 2009, seeking to raise $1 billion at a time when developing nations are paying the highest borrowing costs in almost two years.
The government is offering 10-year notes at a yield of about 135 basis points more than similar-maturity U.S. Treasuries, according to a person familiar with the matter, who declined to be identified because the terms aren’t set. “This is the best time to sell bonds given the market situation,” Finance Ministry Director General Choi Hee Nam said by phone today, adding that pricing is expected to be finalized at about 1 a.m. in Seoul.
The sale is taking place at least five months after arrangers were appointed, having been held up as tensions with North Korea and a possible tapering of U.S. monetary stimulus drove borrowing costs higher. The average yield on emerging-market sovereign dollar debt climbed to 6.42 percent yesterday, the highest since October 2011, a JPMorgan Chase & Co. index shows. That compares with a record low 4.44 percent on Jan. 3 and an average 6.39 percent in the past five years.
“They better issue now rather than later as borrowing costs will climb even faster” once the Federal Reserve begins to rein in asset purchases, said Rees Kam, a strategist at SJS Markets Ltd., a Hong Kong-based financial services company that specializes in fixed income. “We expect solid demand for the debt given Korea’s better economic fundamentals relative to other emerging markets.”
Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc, Korea Development Bank and Woori Investment & Securities Co. are arranging today’s bond sale, according to a finance ministry statement. They were selected in April and the sale of 10-year dollar debt was originally planned for June, Choi said.
“We had to wait for emerging-market issues to calm down a bit on the Fed tapering concern and we decided to do it before the FOMC meeting as the interest rates might go higher,” he said. Bank of Korea Governor Kim Choong Soo said today the U.S. central bank is likely to announce a scaling back of stimulus at a policy review that concludes Sept. 18.
South Korea last sold dollar bonds in April 2009, when it issued $1.5 billion five-year notes and the same amount of 10-year securities, according to data compiled by Bloomberg.
The extra yield investors demand to hold South Korea’s sovereign securities instead of U.S. Treasuries averaged 104 basis points yesterday, down from a June 27 premium of 129 basis points that was the biggest since July 2012, Bank of America Merrill Lynch data show. The gap was 70 basis points on Jan. 15, the smallest since July 2007.
“The sale is not to raise dollars but to assure overseas investors that Korea’s capital markets are solid,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “The sale will likely succeed even in the face of U.S. tapering risk” and rising geopolitical risks in Syria, he said.
The nation’s current-account surplus, forecast to reach a record $53 billion this year, is enabling Asia’s fourth-biggest economy to keep interest rates low to support growth as other emerging markets raise borrowing costs to defend their falling currencies. Gross domestic product will increase 4 percent next year, the fastest pace since 2010, compared with an estimated 2.8 percent this year, the Bank of Korea said in July.
Credit-default swaps insuring the nation’s debt against non-payment dropped 12 basis points this quarter to 79 after increasing 32 basis points in the first half of the year, according to CMA prices. That compares with 96 for China, whose sovereign debt is rated by Moody’s Investors Service at Aa3, the fourth-highest investment grade and the same ranking as Korea.
The won strengthened 4.3 percent against the dollar since the end of June, the best performance among 24 emerging-market currencies tracked by Bloomberg.
The yield on the government’s dollar bonds due November 2025 rose five basis points, or 0.05 percentage point, to 4.23 percent today, according to data compiled by Bloomberg. The spread over similar-maturity Treasuries is 109 basis points, compared with this year’s high of 123 on July 30.