Foreign bonds hailed as a safer bet

Korean investors should consider buying more foreign bonds to diversify their portfolios as the economy looks headed for low growth and the cost of borrowing may be cut further, experts say.

The advice comes after Japanese investors have seen good performances by snapping up foreign bonds after their country lowered interest rates almost to zero in the last decade.

“The financial assets held by Japanese households have been shrinking after hitting a peak of 24 trillion yen [$303 billion] in 1990,” said Ryu Sang-ho, president and CEO at Korea Investment and Securities.

“The situation might have turned out differently if Japanese investors had started putting their money into the foreign bond market sooner.”

Ryu said Korea should learn a lesson from Japanese retail investors about casting a wider net in terms of investment decisions.

Mrs. Watanabe - a generic name for homemaker investors that serves as an indication of how Japanese retail investors are moving - has been further diversifying her currency investments and has recently been looking at the Russian rouble. Previously, she invested in the Brazilian real and Turkish lira.

Among foreign-currency-denominated Uridashi bonds, which mostly cater to retail investors, those denominated in the rouble saw the third-largest net flows in Japan in the third quarter, according to the Financial Times on Tuesday. Those in the lira and real are the two most popular.

Although Japanese retail investors have tended to favor bonds in Australian or U.S. dollars since 2010, experts say the rouble could emerge as a new hot currency even though the total funds invested in such bonds are comparatively small. They cite the rouble’s stability amid a volatile global currency market.

Japanese have been fishing for foreign investment targets in the last decade due to razor-thin interest rates at home, with yen carry trades shaping up as one of the most popular investment options in the country. These effectively borrow against the yen in order to facilitate the purchase of higher yielding assets in other currencies.

Japanese investors who look overseas are used to seeing much higher yields than those who focused on the domestic market or Treasury bonds, according to Japan’s Investment Trusts Association. To continue this trend, they are now looking for fresh blood.

“As yields in Swedish and Brazilian bonds have fallen, Mrs. Watanabe, a loyal customer of such bonds, seems to be losing interest,” said Yim Byeong-ho, chief financial analyst at Samsung Securities’ investment consulting division. “That is why she is focusing on Russia and Turkey, which offer higher interest rates and stronger currencies.”

Although Korean investors have started to show interest in buying bonds in other currencies, a paucity of readily available information is still serving as a strong deterrent, according to analyst Kim Su-man of the IBK Research Center.

“Almost no Korean securities company has enough information to offer a decent analysis on foreign currency-denominated bonds, although there have been increasing inquiries about them from customers,” said Kim. “As those inquiries keep coming in, brokerages are doing more research on buying foreign bonds.”

Previously, Korean investors saw little reason to shop around as the county’s own Treasury bonds have been returning high yields, making them more averse to possible currency exchange losses by investing in foreign currencies.

“Retail investors buy bonds to profit on the interest,” said Kim. “If this cannot be guaranteed due to fickle currency exchange rates, they won’t risk taking on foreign bonds.”

By An Hye-ri, Lee Sun-min [summerlee@joongang.co.kr]