'Repos' Find Favor As Rates Fluctuate

Repurchase agreements are gaining investor popularity as bond prices fall, the Korea Securities Dealers Association said Wednesday. Financial institutions sell such agreements by pledging treasury bonds and blue chip corporate bonds, and sellers agree to buy them back at a given price, guaranteeing a rate of return.

Securities companies sold 2.4 trillion won ($1.8 billion) worth of the agreements through the end of last year and an additional 1.07 trillion won worth during the first four months of this year. Total agreements sold now stand at 3.4 trillion won. Korea Investment Trust Management & Securities Company alone sold 1 trillion won worth during the last six months.

Repurchase agreements are popular because they guarantee a 5 to 6.6 percent return. Maturity can be set between one day and one year, making the instruments similar to a short-term time deposit.

Investors formerly looked for easily accessible money market funds when exchange rates fluctuated, but such funds have recently seen negative returns, leading to more interest in "repos."

Repurchase agreements are considered safe because they are backed by collateral of government bonds and healthy corporate bonds. "Security companies take risks because they have to pay a given rate of interest on repurchase agreements, and rising interest rates lead to losses," said a securities company official. "Our agreements are almost sold out, and we are taking reservations."

The agreements are sold in 5 million won minimum units; the rate of return is a couple of basis points higher than that of time deposits. For thirty-day agreements, the rate at Kookmin Bank's securities department is now 5.1 percent.

by Ha Jae-sik