Foreigners Are Finally Getting Cold Feet on South Korea Debt

  • Global funds sold net $415 million of Korean debt last week
  • Sovereign bond risk rose to highest level since February 2016

Independent Strategy Says N. Korea Will Not Give Up

North Korea’s saber-rattling is at last being felt in its southern neighbor’s bullet-proof bond market.

Foreign investors have started to look for the exits, selling a net $415 million worth of Korean notes last week, only the second weekly outflow since November, according to the nation’s Financial Supervisory Service. That’s a precipitous drop from the $4.3 billion of net buying in the second week of July, which was a record according to data going back to 2011.

Investors beat a fast retreat as Donald Trump’s threat to rain “fire and fury” down on Pyongyang jolted South Korean financial markets and inflamed tensions between the U.S. president and North Korean leader Kim Jong Un. Concerns over a standoff on the Korean peninsula show little sign of abating with South Korea and the U.S. beginning 10 days of annual military drills on Monday.

North Korea told the U.S. on Tuesday it will face “merciless revenge” for ignoring Pyongyang’s warnings over the drills. U.S. Pacific Command chief Harry Harris defended the exercises while calling for a diplomatic solution. He said the military has “complete confidence” in its ability to “destroy any missiles that come into our area.”

“With currency volatility surging on geopolitical tensions, the appetite of foreign investors toward local debt may likely decline from the peak,” said Edward Ng, a fixed-income portfolio manager in Singapore at Nikko Asset Management Ltd., which oversaw $183 billion at the end of March. He said his current position is to “stay light” South Korean debt as the real yield is “among the lowest” in Asia.

Amid the heated rhetoric, South Korea’s sovereign bond risk rose to the highest level since February 2016 last week, putting it briefly above the cost of protecting against a default by China for the first time since May 2013. Benchmark 10-year bond yields have climbed about eight basis points to 2.31 percent in August while the South Korean won has lost 1.4 percent in the past month in Asia’s worst performance.

Still, the yield pickup is not appealing enough to attract some global fund managers. It’s not a buying opportunity as yields “are not exciting enough,” said Manu George, a Singapore-based fixed-income director at Schroder Investment Management Ltd.

“We don’t look at absolute levels, but instead focus on relative levels adjusted for the currency and credit risk,” said George. “We prefer countries such as China, India and Indonesia to Korean government bonds, relatively speaking.”

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