Korean debt bro­kers views di­verge as tur­moil spurs record yields

The Pak Banker - - BUSINESS -

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 10year 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 Seoul­based 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.

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