Investors keep eyes on steady growth of won

Speculation that the Bank of Korea will delay interest-rate increases until the end of 2014 as the won gains cool economic growth is boosting demand for longer-dated debt.

The extra yield investors demand to hold 10-year government notes over three-year securities dropped for two straight months, the longest stretch of declines since March.

The spread between similar-maturity AAA corporate bonds has slid 15 basis points to 62 basis points from this year’s high in August, according to Korea Bond Pricing indexes.

The won’s 7.7 percent rally since June 30 contributed to a 0.6 percent decline in exports in the third quarter while the economy expanded 1.1 percent in the period, the same as the previous three months.

The Finance Ministry warned last month that it could act to counter “herd behavior” in the currency, and the central bank trimmed its growth outlook.

Policy makers will wait until the final quarter of next year for a rate increase, according to economists surveyed by Bloomberg.

“We have bought more 10-year sovereign bonds since early September as we see the growth momentum is slowing this quarter,” said Moon Dong-hoon, managing director in the fixed-income division of KB Asset Management, which oversees 13 trillion won ($12.3 billion) of assets. “I bet the yield for longer debt will fall further.”

The spread between Korea’s three-year and 10-year sovereign notes has dropped to 56 basis points from a two-year high of 76 basis points on Aug. 23, Bloomberg data show.

The Bank of Korea will raise its benchmark policy rate to 2.75 percent from the current 2.5 percent in the fourth quarter of next year, according to the median estimate of economists in a Bloomberg survey conducted Oct. 17 to 22.

The previous survey from Sept. 27 to Oct. 2 showed expectations for a rate hike from the third quarter of 2014.

Bloomberg