Foreigners still buying Korean bonds

Foreign net investment in Korean bonds rose in January for the first time in six months, data showed yesterday, offering further evidence that Asia’s fourth-largest economy is better prepared for the latest global market storm.

Foreigners put 655 billion won ($604.4 million) into local debt last month, the Financial Supervisory Service said in a statement. That stands apart from sharp declines in the won and the main stock index.

The U.S. Federal Reserve’s unwinding of its bond-buying stimulus and fresh doubts about China’s growth have recently roiled Korea and other markets. The local currency touched a four and a half month low against the dollar during the swoon and foreigners took out 706 billion won from local stocks last month, contributing to a 3.5 percent decline for the benchmark Kospi during the month.

But the benchmark 10-year government debt rose just 2.9 basis points in January, paring losses from earlier in the month, while the most liquid 3-year debt ended January 2.2 basis points higher.

Analysts said some offshore investors managing emerging market portfolios pulled money out of more volatile markets and into Korean bonds in search of a haven.

“Korea is an attractive market offering an attractive high real yield relative to its AA-creditworthiness,” said Richard Lawrence, senior vice president of portfolio management for U.S.-based Brandywine Global. The firm manages around $50 billion in assets.

“We view Korea as being somewhere between an advanced emerging market and a fully developed market,” he said, adding that Brandywine added a “small exposure” to local bonds in late 2013.

While Korea probably won’t see the kind of sharp, major inflows to its bond market in early 2013, analysts say that its strong fundamentals - continued current account surplus, manageable government deficit and large foreign currency reserves - have shielded it from massive capital swings seen in countries such as Argentina and Turkey and boosted the appeal of local debt.

Such fundamentals also rule out the possibility that the Bank of Korea will raise interest rates to defend its currency, which further reduces bond investment risks at a time when some central banks have already resorted to such measures to stabilise their markets, analysts say.

“Korea can’t escape from the current categorization as an emerging economy, but within that group it is the top country for investment,” said Hyundai Securities fixed-income analyst Park Hyuck-soo. “And latest market moves indicate that Korea is being differentiated.”

But one bond trading head at a European bank, who declined to be identified, said the recent trend of foreign investors increasing their exposure to the shorter end of the yield curve is a cause for concern as they tend to be more sensitive to currency fluctuations.

“Nobody thinks the dollar will rise to 1,500 or 2,000 against the won right now; investors on the short end of the curve are staying put because the majority opinion is that dollar-won will rise to around the low 1,100s and then fall back,” he said. Reuters