With inflation curbed, investors bullish on debtWestern Asset Management and Eastspring Investments are bullish on Korea’s debt as inflation pressures ease and a record current-account surplus supports the won.
Bonds protected against living-cost changes signal expectations that price changes will average 2.04 percent in the coming eight years, below the central bank’s target range of 2.5 percent to 3.5 percent. The break-even rate, the gap between yields on the 2021 linker and conventional bonds, is at its lowest level since June 19 after falling 18 basis points in the quarter.
Western Asset has more Korean notes than the benchmark index it uses to measure performance and State Street Global Advisors says it likes the securities because inflation is near a 14-year low. The central bank will leave its benchmark interest rate at 2.5 percent through June 2014, according to the median forecast of surveyed economists.
“The inflation outlook is subdued, while Korea’s strong fundamentals and external position stand out favorably compared with most of Asia,” said Desmond Soon, portfolio manager at Western Asset, which oversaw $436 billion globally in June, last week. “On a structural basis, one can be bullish on Korean bonds and the Korean won.”
The Bank of Korea kept its seven-day repurchase rate unchanged for the fourth straight month on Sept. 12 as capital inflows drove the won to the highest level since February. Inflation was 1.3 percent in August, hovering near May and June’s 1 percent, the least since 1999, while producer prices fell 1.3 percent, providing room for the central bank to keep its policy rate at the lowest level since 2011 to support Asia’s fourth-largest economy.
Korea’s assets were among the most resilient to capital outflows from emerging markets amid speculation the Fed will reduce its $85 billion a month of bond purchases. Won-denominated sovereigns fell 0.2 percent in the past three months, the second-best performance after Singapore among 10 major economies, according to HSBC Holdings indexes.
The Federal Reserve refrained from scaling back monetary stimulus on Wednesday, sparking a rally in emerging-market assets. Korea’s financial markets traded yesterday for the first time since the decision.
Overseas investors bought a net 3 trillion won ($2.8 billion) of Korea’s stocks and bonds in July, the most since February, according to the Financial Supervisory Service. There was a net outflow of 2.1 trillion won from bonds in August, while exchange data showed foreigners poured a net $7.9 billion into equities from the end of July to Sept. 17, before Chuseok.
The nation posted a current-account surplus of $6.8 billion for July after an excess of $7.2 billion in June, central bank data show. The Bank of Korea forecasts the excess will be a record $53 billion in 2013. The yield on three-year bonds fell three basis points this quarter to 2.85 percent on Sept. 17, and the won rose 6.2 percent, the best performance among Asia’s 11 most-traded currencies.
“I don’t think there’s going to be a rate hike in Korea this year, and I continue to be positive on the bond market,” said Guan Yi Low, who helps oversee about $95 billion as the Singapore-based fixed-income investment director at Eastspring, a unit of the U.K.’s Prudential. “The view on the Korean won right now is quite positive, but we think the current-account surplus theme has been fully priced in.”