Bond investors still not buying

Korean bond investors say the central bank’s revised economic outlook is still too optimistic, suggesting yields will extend declines from record lows.

The 10-year yield has dropped seven basis points to 2.38 percent since the Bank of Korea lowered its growth forecast for this year to 3.4 percent from 3.9 percent on Jan. 15, while cutting its inflation projection to 1.9 percent from 2.4 percent. Governor Lee Ju Yeol said after holding the benchmark interest rate at 2 percent that there are both “upside and downside risks” to the monetary authority’s projections.

Samsung Securities expects borrowing costs be lowered as early as next month and the government has said economic policies in 2015 will remain expansionary, including accelerated spending. Yields are also set to fall as bonds rally globally on tumbling oil prices and the prospect of policy makers in Europe and Japan boosting stimulus.

“Longer-dated yields have room to decline further on globally low inflation, regardless of whether the central bank cuts rates or not,” Park Jong Youn, a Seoul-based fixed-income strategist for NH Investment & Securities Co., said by phone yesterday. “The 10-year yield could fall to as low as 2.25 percent in the first half of this year.”

The yield on notes due September 2024 reached a record low of 2.34 percent on Jan. 16, Korea Exchange prices show.

Samsung Securities, the nation’s largest brokerage by market value, predicts gross domestic product will increase 3 percent in 2015, and consumer prices will rise 0.9 percent. NH Investment & Securities sees inflation around 1.5 percent this year. The estimates are more bearish than the central bank’s.

Korea Investment Management Co. and HSBC Holdings Plc say the Bank of Korea, which last week cut its forecasts for the third time since July, will make further revisions.

“Considering the central bank’s frequency of revising its economic outlook, I expect the recent forecasts to also be lowered,” said Lim Kwang Taek, the Seoul-based head of fixed income at Korea Investment Management, which oversees 29 trillion won ($27 billion) of assets. “Yields have room to decline further in both the long- and short-tenors.”

HSBC estimates Korea’s economy will grow 3.1 percent in 2015 and predicts the central bank will cut its benchmark rate to an all-time low of 1.75 percent this quarter, Hong Kong- based economist Ronald Man wrote in a Jan. 15 report. Nomura Holdings Inc. pushed back its estimated timing of policy easing to the second quarter after Governor Lee said Jan. 15 the current level is “not insufficient” to support growth, while Citigroup Inc. scrapped its rate-cut call.

Lee said lower oil prices are good for the economy, and Vice Finance Minister Joo Hyung Hwan said in an interview a day later that the “basic tone” is one of improvement and recovery. Joo said the government is sticking to its December projection of 3.8 percent expansion this year and plans to speed up the use of a 46 trillion won stimulus package announced last year, and will allocate its record 375.4 trillion won budget.

“The BOK Governor sounded less dovish than expected during his post-meeting” remarks, noting that the revised 3.4 percent forecast is not far from South Korea’s potential growth, Albert Leung, a Hong Kong-based strategist at Bank of America Merill Lynch wrote in a report yesterday. “From current levels, a further rally in Korea’s 10-year government bonds may require another leg lower in global yields.”

Consumer prices rose 0.8 percent in December from a year earlier, the slowest pace since 1999, the statistics office reported Dec. 31. The economy probably grew 0.4 percent last quarter from the previous three months, Lee said Jan. 15. That’s the slowest since the period ended September 2012. The central bank officially releases fourth quarter growth figures Jan. 23.

While the drop in oil prices to below $50 a barrel from above $100 in July can be supportive of growth, it can also hurt economic sentiment by causing deflation, according to Chung Eui Min, a Seoul-based fixed-income analyst at Mirae Asset Securities. Chung expects the Bank of Korea to cut rates in the first half, while Daewoo Securities predicts a reduction as early as March.

“It remains to be seen how much the drop in oil prices will support growth,” Yoon Yeo Sam, a Seoul-based fixed-income analyst at Daewoo Securities, said by phone yesterday. “I recommend investors hold bonds as there’s room for yields to fall by another 10 basis points across all tenors.”

Bloomberg