Korean bonds to stay strong amid rate bets
ANY RATE HIKE by the Bank of Korea (BoK) will probably be one and done for the year, and shouldn’t impact investor demand for government bonds, according to the country’s second-largest asset manager.
“A rate hike is mainly to minimize the potential negative impact caused by a widening gap between the Federal Funds Rate and the local policy rate before economic fundamentals wane,” said Jinha Kim, head of global fixed income in Seoul with Mirae Asset Global Investments Co. which oversees 108 trillion won ($96 billion). “Under these circumstances the BoK wants to hike rates one time before it gets late.”
The hawkish tone seen in the minutes of the BoK’s July meeting released last week were largely interpreted by strategists as a call for a rate increase coming as early as August.
Some members pointed to a rise in inflation, the widening US rate differential and the desire to lessen financial imbalances among reasons to hike rates.
While other emerging bond markets in Asia are struggling with withdrawals, foreign funds have pumped almost $32 billion into South Korean bonds this year, turning the market into a haven. A rate hike by the BoK this year would be the first since last November, and economists only expect a third hike next year.
The country’s 3-year bond yield has fallen over 20 basis points since its February high to around 2.10% Monday. The yield on 3-year US Treasuries was about 2.73%.
“I don’t expect a one time hike can have any impact on foreign flow,” said Kim. “A one time hike is already priced in to local government bonds,” he said. Mirae sees the 3-year KTB yield between 2.08% and 2.13% by year-end.
AUGUST POSSIBILITY
According to Kim, the central bank could hike in August but expects it to move at the very least by October, “before it’s too late.” Other investors see less of an urgency to raise rates.
“Korea doesn’t have an inflation problem, per se, so the BoK isn’t facing a test of its credibility. It is taking monetary policy to a more neutral stance as circumstances allow,” said Cristiana De Alessi, London-based emerging market debt portfolio manager for local rates at BNP Paribas Asset Management who sees a BoK hike most likely in November.
“I’m constructive on the short end of the Korea curve while the long end will be more tied to global rate movements,” she said.
SOFTENING DATA
For Eugene Leow, a fixed-income strategist at in Singapore at DBS Group Holdings Ltd., the central bank may want to keep the option of normalizing policy, as there has been some softening recent economic data. The central bank in July cut its growth forecast down to 2.9% from its earlier 3% projection while the government also lowered its forecasts.
A rate hike is likely in December and is not likely to be the first of many, according to Leow.
“Any hike cycle by the central bank of Korea is likely to be modest compared to the Federal Reserve,” he said. This means the country’s debt is still “very attractive,” at least from a hedged perspective, he said. — Bloomberg