Korea’s 50-Year Bond Shows Aging Investors Want Mature DebtBy and
Yield demand will lure investors, Standard Life’s Catlow says
UN predicts ratio of Asians aged over 60 will double by 2050
South Korea’s first-ever sale of 50-year bonds is drawing investor interest from Edinburgh to Tokyo, driven by tumbling global yields and aging populations.
A change in international accounting rules is funneling cash into longer maturities just as record-low borrowing costs prompt more issuers to sell so-called super-long bonds. China and Thailand have already started issuing 50-year debt, and there is speculation Japan will do the same. Korea’s treasury will offer the securities as soon as possible, potentially in September, a finance ministry official who declined to be named said last week.
“Given the strength of demand for the long end of the curve and the lack of supply to meet this growing demand, our view would be that there will be reasonable appetite,” said Jennifer Catlow, an investment manager in Edinburgh at Standard Life Investments, which oversees $360 billion. “For us, the Korean bond market has represented a source of attractive returns in the environment where Korean policy rates are falling and investors continue to seek yield.”
Sovereign and corporate bond yields from Germany to Japan have fallen below zero as the European Central Bank and Bank of Japan pile on record stimulus to revive growth, while the Federal Reserve is divided over whether to raise interest rates this year. The United Nations forecasts the ratio of people in Asia over 60 will more than double by 2050, led by Japan to 41 percent of the population and South Korea 39 percent.
South Korea is considering starting sales of 50-year debt and is gathering opinions from market participants and experts, the Finance Ministry said Aug. 16. The nation will start with an initial amount of about 1 trillion won ($896 million) and reduce sales of 30-year securities as the total amount of issuance approved by parliament is limited, the official said the following day, declining to be named as the discussions were yet to be finalized.
“The 50-year is an important benchmark and it is only recently that governments in the region are trying to tap the long end,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore. “It makes sense to lock in these low interest rates while also providing an aging population with an asset that provides steady returns.”
Interest will not only come from Korea but also from regions where rates are negative, such as Japan and Europe, Leow said.
China first tapped the market for 50-year bonds in 2009, followed by Thailand in 2011. The Chinese securities returned 19 percent in the past 12 months, while Thailand’s gained 24 percent as aging populations saw more savings invested in fixed-income funds.
New regulations are the biggest contributor to lower yields, Standard Life’s Catlow said. The International Accounting Standards Board has mandated life insurers extend the duration of their liabilities from around seven years currently to about 14 years by 2019.
“There is significant demand for long-duration domestic assets,” she said.
Korea’s won sovereign bonds returned 5.9 percent this year and gained every year since a Bloomberg index of the securities was set up at the end of 2010. The nation’s 30-year bonds currently yield 1.51 percent. Their extra yield over two-year notes shrank to 22 basis points on July 28, the narrowest in more than three years, and was at 27 basis points on Thursday.
The flattening of the so-called yield curve is one of the key reasons behind Korea’s decision to start selling 50-year bonds, said Donghyun Park, a principal economist at the Asian Development Bank in Manila. Mature capital markets, a high sovereign rating and stable prices are also preconditions for such sales, he said.
South Korea is the third-biggest local bond market in the region after Japan and China with $1.7 trillion of debt, ADB data show. The nation is ranked AA at S&P Global Ratings, the third-highest investment grade.
The Bank of Korea cut its policy rate to a record 1.25 percent in June as the economy grapples with a slump in exports. Sixteen of 24 economists surveyed by Bloomberg predict another reduction by December.
Pension fund assets in the nation surged to $98.8 billion at the end of 2014 from $12.7 billion a decade earlier, according to the Organization for Economic Cooperation and Development. The comparable figure in Japan is $1.22 trillion, and in China is $125.7 billion.
“With aging, investors tend to redeem their investments later, so there is a need from insurers for assets with a longer duration,” said Heo Do Il, a general manager for Shinhan Life Insurance, a unit of the biggest banking group in South Korea by market capitalization. “There weren’t enough long-term notes.”