Korean Debt Brokers Views Diverge as Turmoil Spurs Record Yieldsby
Too early to announce end to bond rally, NH Securities says
Daewoo says take profit as economic slowdown overestimated
After South Korea’s 10-year bond yield fell to a record, two of the nations’ biggest brokerages have different opinions on whether the rally can last.
Slowing domestic growth and turmoil in Chinese and global markets has spurred demand for the relative safety of sovereign debt in January and driven about $2.5 billion from South Korean shares. Both the government and the central bank have cut their 2016 estimates for expansion this year.
NH Investment Securities Co., the second-largest brokerage, predicts bonds will keep climbing and the 10-year yield will fall to 1.8 percent by the end of June from an unprecedented 1.99 percent reached this week. Daewoo Securities Co., the third biggest, said investors should lock in the gains now because they have overestimated South Korea’s slowdown.
"Profit-taking can make sense in the very short term, but it’s too early to announce an end to the decline in yields," said Park Jong Youn, a Seoul-based fixed-income analyst for NH Securities. "I think it’s better to build bond-buying positions for the long term as we see the global economy faring worse than expected. That will fuel expectations for monetary stimulus in major countries, including South Korea."
Ten-year notes fell on Tuesday, halted a two-day advance. The yield rose two basis points to close at 2.01 percent in Seoul, Korea Exchange prices show. The yield on securities due in 2018 was little changed at 1.61 percent.
South Korean bonds have rallied in January and returned 0.8 percent, following December’s 1.4 percent gain, according to a Bloomberg index. While uncertainty about China’s economy and a slump in oil have boosted appetite for debt, investors are also focused on the outcome of the Federal Reserve’s interest-rate meeting later Wednesday. Higher Treasury yields could damp the appeal of local notes if the U.S. continues to tighten monetary policy.
Seil Lee, a fixed-income analyst at Daewoo Securities in Seoul, recommends selling South Korean short-term bonds ahead of the Fed meeting. He predicts the 10-year yield will move around 1.9 percent to 2.1 percent this quarter, and sees the Bank of Korea cutting its benchmark interest rate by a quarter of a percentage point in March from 1.5 percent currently.
"While overall market sentiment is favorable to buy bonds, yields are too low and have reflected the sluggish economic situation too much," said Lee. “If Korean bonds rally further from current levels, investors can consider taking profit on short-term debt."
The Chinese economy is the biggest factor that has increased volatility in global markets this year, BOK Governor Lee Ju Yeol said in a meeting in Seoul on Wednesday. The BOK lowered its 2016 growth estimate to 3 percent from 3.2 percent in October, and the government sees 3.1 percent, less than 3.3 percent previously.
In the currency market, the South Korean won strengthened 0.1 percent on Wednesday to 1,202.25 a dollar, after falling 0.8 percent a day earlier, data compiled by Bloomberg show.