Brokerages await bond bonanza post-cut

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Brokerages await bond bonanza post-cut

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The central bank’s decision to shave a quarter point off the key interest rate to 2.75 percent yesterday isn’t just good news for liquidity-starved companies and households that crave access to cheap money, but also a boon for local brokerage firms as their bond prices are set to rise.

KDB Daewoo Securities and Woori Investment and Securities each hold 11 trillion won ($9.87 billion) in bonds, while Samsung Securities has 8 trillion won.

They are the nation’s top three securities firms. Smaller domestic brokerages hold between 2 trillion and 5 trillion won.

“The cut is likely to improve the value of the top two players’ bonds by around 7 billion won each due to the extra profits they will generate,” said an executive at local brokerage firm. Bond prices move inversely to interest rates.

Bond prices surged when the Bank of Korea made a surprise rate cut in July, its first cut in 41 months.

This pushed the rate of three-year Treasury bonds to 2.7 percent that month, down from 3.3 percent one month earlier.

The cut resulted in some brokerage firms reaping extra profits of up to 10 billion won on their previously issued bonds.

“Some people have said jokingly how nice it was of the BOK’s Monetary Policy Committee to give us an extra bonus,” said a dealer at a local securities firm.

Market observers said that due to the deepening euro zone debt crisis, investors will flock to scoop up bonds seen as safe havens.

“With the rate cut and the International Monetary Fund’s lowering of Korea’s economic growth rate, investors will probably opt for bonds over other alternatives as long as jitters and uncertainty persist,” said an official at the bond bureau of the Korea Financial Investment Association.

Analysts at local brokerages said another cut from the BOK may even be on the cards early next year.

“If external uncertainty grows, the central bank may slash another 0.25 percentage point off the key rate sometime between March and April,” said Yeom Sang-hoon, an analyst at SK Securities. “As the key rate drops, more people turn to bonds.”

If the interest rate on bonds also drops, investors can earn more profits on those they have already bought, which makes the overall market more attractive,” said Tongyang Securities analyst Kim Hoo-jung.

Others expected less of an impact based on the logic that the rate cut had already been anticipated.

“When the economic outlook is grim, bond buying is strong,” said Na Jung-oh, an analyst at Korea Investment and Securities. “But as anticipation of the cut has been already reflected in the market, it will keep crawling along for some time with no major momentum.”

Backing this up, the bond market remained unmoved yesterday by the BOK’s announcement.

The yield on three-year Treasuries added 0.03 percentage point to 2.74 percent, and the return on the benchmark five-year government bonds also added 0.03 percentage point to 2.81 percent.

By Kim Mi-ju [mijukim@joongang.co.kr]

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