RBA Buying Won Signals Bigger Role in Reserves for Korean Assets

  • Australia central bank assigns 5% of reserves each to won, yen
  • Allocation may `presage broader move' by other countries: ING

Australia’s central bank is unlikely to be alone among reserve managers in turning to South Korea’s won for something they can no longer get in Germany or Japan: yield.

The Reserve Bank of Australia said last week it had allocated 5 percent of net reserves to the won, in line with holdings of the Japanese yen, Canadian dollar, British pound and Chinese yuan. The euro’s share was cut to 20 percent from 45 percent in 2012, while the U.S. dollar’s increased. Among the seven, only Chinese and U.S. 10-year sovereign bonds offer higher yields than South Korean notes. Similar yields in Germany and Japan are close to or below zero.

South Korean Bond Yields are Among the Highest in RBA’s Reserves Basket

Source: Bloomberg

Reserve managers buying Korean debt will help support a currency that’s dropped 8.7 percent in a year as slumping exports slowed growth in Asia’s fourth-largest economy and money flowed out of its stock market. Global investors pumped more than $26 billion into the nation’s bonds in the same period, lured by central bank’s 1.5 percent benchmark rate and sovereign ratings that are among the highest in developing countries.

"The RBA move will presage a broader move from other central banks into the won," said Chris Turner, the head of currency strategy at ING Groep NV in London. "In a world where most credit ratings have been deteriorating, the won is on a AA- from Standard & Poor’s, has one of the most liquid sovereign bond markets in the emerging-market space and at least a positive bond yield."

Sovereign Ratings

S&P and Fitch Ratings rank South Korean sovereign debt at the fourth highest investment grade, and Moody’s Investors Service assesses it a notch higher at Aa2, the same level as France and above Belgium and China. 

Inflows to local debt over the past year are only second in Asia to Japan, which has received more than $77 billion. South Korea had the equivalent of $700 billion of outstanding government bonds at end-2015, compared with $208 billion in Thailand, $4.1 trillion in China and $8.3 trillion in Japan, according to data from the Asian Development Bank. The won is less volatile than more than half the 23 emerging-market currencies tracked by Bloomberg, based on its one-year implied volatility, a gauge of swings used to price options.

The yield on the 10-year won-denominated sovereign notes stands at 1.88 percent, and fell to an unprecedented 1.77 percent last month. That’s still attractive after Bank of Japan lowered interest rates below zero this year and the European Central Bank has hinted it may add to its monetary stimulus, policies designed to feed demand for higher-yielding assets.

‘Makes Sense’

"As the ECB is intensifying its negative interest-rate policy, it seems the RBA needs to look for yields," said Ken Hu, the Hong Kong-based chief investment officer for Asia-Pacific fixed income at Invesco Ltd., which manages about $741 billion. "The depth and size of the Korean bond market are pretty good, so from the liquidity point of view it makes sense."

Governments have been turning to emerging markets for investment as monetary easing since the 2008 financial crisis drove down global yields. China’s yuan made up 1.1 percent of 38 countries’ reserve assets in 2014, according to a July report by the International Monetary Fund, which added to the currency to its special drawing rights basket.

In the past two or three years, central banks and sovereign wealth funds have made up a larger portion of inflows, supporting demand for longer-end bonds, according to Kim Myoung Sil, a fixed-income analyst at KB Investment & Securities Co. in Seoul.

"Global investors with a long-term investment horizon have helped stabilize the bond market," she said. "There’s still more room for the BOK to maneuver its policy given that the benchmark rate is at 1.5 percent. Foreign investors, especially central banks and sovereign funds, are likely to keep buying Korean bonds."

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