JPMorgan Bullish as Goldman Cools Amid Debt Sales

JPMorgan Asset Management Ltd. and PineBridge Investments said South Korean global corporate debt is still attractive, even as Goldman Sachs Group Inc. recommended shunning yield premiums near a seven-year low.

Borrowers have sold $20.5 billion of international bonds this year, shy of the record $21 billion in the first half of 2012, according to data compiled by Bloomberg. Korea Gas Corp., Kookmin Bank and Korea National Oil Corp. are holding investor meetings this week for possible dollar- or euro-denominated note offerings, people familiar with the matter said.

South Korea’s sovereign default risk fell to a lowest since 2008 this month and the won reached the strongest in almost six years as investors show confidence in Asia’s fourth-largest economy, which the central bank forecasts will grow at its fastest pace in five years in 2015. A global hunt for yield has driven “profound” outperformance of Korea credit, making other Asian bonds seem better value, Goldman Sachs wrote in a report this month.

“We are active participants in Korean paper,” Stephen Chang, head of Asian fixed income in Hong Kong at JPMorgan Asset said on June 12. “Korean credit spread levels are still attractive versus U.S. investment grade,” he said, adding that decisions on whether to buy new issues depend on valuations.

Goldman Warning

South Korean investment-grade notes yield 2.11 percent on average, according to a Bank of America Merrill Lynch index. That compares with 1.47 percent for corporate bonds from developed markets, a Merrill Lynch and Pacific Investment Management Co. measure shows.

The average premium for dollar bonds sold by Korean issuers over U.S. Treasuries has contracted 39 basis points this year to 121.5 yesterday. It touched 121 on April 25, the least since July 2007, JPMorgan Chase & Co. indexes show.

“The outperformance of Korea has been profound,” Goldman Sachs analysts led by Kenneth Ho wrote in a June 12 report. “We retain our negative view, because we see better value elsewhere in Asia investment grade, even though we believe that search for yield motives will likely keep Korea spreads tight,” Ho said.

Investors have been seeking extra yield after rates sunk globally as the world’s major central banks held key lending rates near zero and enacted unprecedented monetary easing. The Federal Reserve said yesterday that interest rates will remain low for some time as U.S. growth economic growth recovers.

High Quality

“While credit spreads of Korean bonds may look tight, the volatility of them is also very low,” Arthur Lau, head of Asia ex-Japan fixed income at PineBridge in Kong Kong, which oversees about $71 billion, said in June 13 interview. “The high credit quality nature of Korean bonds also appeals to many long-term investors who are looking for stable and predictable returns.”

The 90-day historical volatility of Korean sovereign dollar debt maturing in April 2019 has fallen to 2.82 percent from as high as 14.46 percent in 2009.

Global investors are seeking higher yields in longer-maturity bonds. The extra yield investors demand to hold 10-year U.S. Treasuries over five-year securities tightened 37 basis points to 92 this year, Bloomberg-compiled data show.

“Now seems like a good time to sell long-dated dollar bonds,” Lee Sang Wook, a spokesperson for Korea Gas based in Seongnam near Seoul, said by phone on June 17. “We are considering sales for refinancing maturing debt and possible overseas use.”

Korea Oil, Kookmin

Korea National Oil is mulling offshore issuance to refinance debt, Choi Hong Seok, a spokesperson for the Anyang, South Korea-based company, said by phone on yesterday. Kookmin Bank declined to comment.

The won touched 1,015.25 per dollar, the strongest level since August 2008, on June 10. Its 3 percent advance this year is the second biggest among emerging-market currencies. Ten-year won-denominated government bond yields have fallen 21 basis points since March 31 to 3.305 percent yesterday.

Credit-default swaps insuring South Korea’s sovereign debt against non-payment for five years fell to 49.5 basis points on June 6, the lowest close since January 2008, according to data provider CMA. That compared with 68.5 basis points for China, whose sovereign debt is rated Aa3 by Moody’s Investors Service, the same as South Korea.

Foreign-currency corporate bond sales rose 52 percent this year, data compiled by Bloomberg show. Demand has been driven by onshore and offshore developed market investors and a drop in net issuance, Goldman Sachs said. Borrowers face more than $47 billion of maturing offshore bonds this year, almost double the $26.7 billion in 2013, according to Bloomberg-compiled data.

Investors in the north-east Asian country increased holdings of Korean paper to $20.5 billion as of end-March, compared with $11.95 billion at the end of 2010, according to a May statement from the Bank of Korea.

“Supply of Korean bonds is expected to be limited this year,” PineBridge’s Lau said. “There may be room for spreads to tighten further.”

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