Photographer: SeongJoon Cho/Bloomberg

BOK Bets Seen in Biggest Won Bond Gain Since 2012: Korea Markets

Investors are betting South Korea’s bonds will extend their best rally since July 2012 as global monetary easing adds pressure on the central bank to cut interest rates.

Yields on won-denominated sovereign debt fell to unprecedented lows last month as foreign funds increased their holdings by $1.32 billion, data compiled by Bloomberg show. The three-year yield dropped below the Bank of Korea’s 2 percent benchmark rate for the first time since Dec. 14, a day before it was cut from 2.25 percent. The next policy review is on Feb. 17.

“A rate cut is likely in March or April,” Jung Sung Wook, a fixed-income analyst for SK Securities Co. in Seoul, said by phone Monday. “It will be hard for the Bank of Korea to sit back if other central banks in the region join the global easing trend and competitively devalue their currencies.”

Easing by at least 13 central banks this year has helped drive investors into higher-yielding markets including South Korea, where BOK Governor Lee Ju Yeol has refrained from cutting rates in 2015 despite the slowest economic growth in more than two years. Demand for the nation’s assets is also underpinned by a current account that has been in surplus since March 2012.

“Given solid economic fundamentals such as a large current-account surplus, 2 percent yields on government bonds make Korean assets attractive,” Kim Jin Ha, the Seoul-based head of global fixed income at Mirae Asset Global Investments Co., which oversees about 63 trillion won ($57 billion), said in a Jan. 28 phone interview.

Yields Drop

The benchmark 10-year yield fell 36 basis points to 2.24 percent last month. The notes pay eight times more than in Japan and Germany and compare with 1.67 percent yield on similar U.S. Treasuries. The three-year Korean yield dropped 13 basis points, or 0.13 percentage point, to 1.97 percent in January.

The yield on sovereign notes due December 2024 fell two basis points to a record 2.22 percent today, Korea Exchange prices show. The three-year yield dropped four basis points to an unprecedented 1.95 percent.

“Greater risk appetites will mean more money coming into emerging markets, and the reach for yield will extend to Korea,” Tim Condon, the Singapore-based head of Asia research at ING Groep NV, said by e-mail on Jan. 28.

Condon predicts 10-year yield will drop to 2.10 percent by the year-end, while NH Investment & Securities Co. expects that level could be reached as early as the first half of 2015. The three-year yield will approach 1.80 percent this year, according to ING, while NH Investment sees a drop to 1.90 percent.

Australia Cuts

Australia today unexpectedly cut its benchmark rate to a record, joining Switzerland, Singapore, Canada, Denmark, Russia and India in easing policy this year. The European Central Bank last month pledged to buy up to 60 billion euros ($68 billion) of assets a month through September 2016, and signaled additional purchase may follow.

“Speculation for the BOK’s rate cut will heighten if liquidity from the ECB’s easing flows to South Korean bonds and supports the won,” Shin Hong Sup, a Seoul-based fixed-income analyst for Samsung Securities Co., wrote in a Jan. 30 report.

The won, which initially strengthened to a two-month high on Jan. 16, erased its gains to end the month 0.3 percent weaker on speculation South Korea will join the global wave of monetary easing. The currency rose 0.3 percent to 1,100.52 a dollar as of 12:37 p.m. in Seoul Tuesday, paring its 2015 decline to 0.8 percent, according prices compiled by Bloomberg.

“Bond yields are unlikely to rebound after the reduction as investors will continue betting on further easing,” said Jung from SK Securities.

Central banks in the euro area are likely to be the main buyers of Korean bonds, particularly longer-dated notes, analysts at NH Investment & Securities led by Park Jong Youn and Kim Ji Man in Seoul, wrote in a Jan. 29 report.

Federal Reserve

Even so, the prospect of the Federal Reserve raising U.S. interest rates this year will limit fund flows into South Korea, according to the government-funded Korea Center for International Finance and Daewoo Securities Co. Investors may prefer U.S. assets, Yoon In Koo, a fixed-income analyst at Korea Center in Seoul, said by phone on Jan. 27.

“Money will flow to the U.S. and then to emerging economies with solid fundamentals,” Wontark Doh, the head of overseas fixed-income investment in Seoul at Samsung Asset Management Co., oversees $162 billion in assets, said by phone Jan. 28. “Expectation for the BOK’s rate cut can also gain strength. The three-year yield can approach 1.90 percent range in a month, and the 10-year yield can see levels of 2.10 to 2.20 percent.”

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