Worst Korea Bond Losses Since 2013 Loom as Rate-Cut Delays Seen

  • Korea Black Friday festival boosts sales at largest retailers
  • Barclays sees U.S. rate-rise bets delaying BOK easing to 2016

South Korea’s bonds are set for their worst quarter in more than two years on bets the central bank will delay interest-rate cuts.

Consumers returning to stores after the end of the Middle East Respiratory Syndrome outbreak boosted economic growth from a two-year low last quarter and the two-week Korea Black Friday shopping festival in October led to a 21 percent increase in sales at 22 large retailers. HSBC Holdings Plc and Nomura Holdings Inc. pushed back calls for a rate cut to next year, and Barclays Plc said rising odds of a U.S. borrowing cost increase will also delay further BOK easing.

Bonds slumped, with the three-year sovereign yield jumping 24 basis points from an all-time low of 1.57 percent on Sept. 30, the most since the three months ended June 2013. NH Investment & Securities Co. predicts it will rise another 10 basis points to end the year at 1.90 percent. The Bank of Korea will hold its main policy rate at 1.5 percent on Nov. 12, according to all 18 economists surveyed by Bloomberg.

South Korea’s two-year bond yield has climbed nine basis points in the last three months, compared with three basis points rise in Australian sovereign notes with same maturities and 45 basis points in Indonesia’s rupiah-denominated debts.

"Investors are in a wait-and-see mode because there isn’t much room to profit from buying bonds,” said Moon Dong Hoon, Seoul-based head of fixed income at KB Asset Management Co., which oversees the equivalent of $42.3 billion. “It seems unlikely that the BOK will cut rates in the foreseeable future, so market participants are hesitant to jump in and buy bonds at current levels."

The spread between three-month certificates of deposit and similar-term CD forward contracts turned positive on Nov. 6 for the first time since June 2014, according to data compiled by Bloomberg. The gap averaged minus 20 basis points in the run-up to the four rate cuts since August 2014.

Yield Outlook

The yield on bonds maturing in June 2018 rose seven basis points to 1.80 percent on Monday, Korea Exchange prices show, while that on benchmark 10-year notes climbed nine basis points to 2.28 percent. NH Investment & Securities predicts the 10-year yield will end the year at 2.50 percent.

"The BOK will probably stay on hold by the first half of 2016, and economic indicators are likely to be good in the first quarter,” said Park Jong Youn, a fixed-income analyst at NH Investment & Securities. "It may be cheaper to buy bonds next year.”

Economic growth accelerated 2.6 percent in the third quarter from a year earlier, from 2.2 percent in the second. Private consumption rose 1.1 percent after shrinking in the preceding three months and government spending increased 1.9 percent. Consumer prices climbed 0.9 percent in October, the most in 11 months, while exports shrank for the 10th month.

Growth Outlook

The BOK said last month the economy will continue to recover on domestic demand even though there are uncertainties about the nation’s growth due to external conditions. The central bank cut its 2015 GDP expansion forecast to 2.7 percent from 2.8 percent and lowered next year’s estimate to 3.2 percent from 3.3 percent.

"While the authorities are tilting toward the view that the worst its over, the economy still lacks strong growth momentum,” said Kong Dong Rak, a Seoul-based fixed-income analyst at Korea Asset Investment Securities Co. “While we no longer expect the BOK to resume lowering rates this quarter, we expect them to cut by 25 basis points each in the first and second quarters of next year.”

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