Tags: BlackRock Says BOK to Fed Working Against Bonds Korea Markets

BlackRock Says BOK to Fed Working Against Bonds: Korea Markets

Sunday, 01 September 2013 11:45 AM

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Sept. 2 (Bloomberg) -- BlackRock Inc. is standing aside while global funds load up on South Korean bonds, concerned over a central bank battle to curb household debt and a reduction in U.S. monetary stimulus.

Joel Kim, Singapore-based head of Asia-Pacific fixed income at the world’s biggest money manager, said in an e-mail interview that his Korean asset holdings are lower than the weighting in his benchmark. Ten-year yields have jumped 76 basis points since April to 3.53 percent, and reached a 15-month high on Aug. 19, data compiled by Bloomberg show. Similar rates in China rose 60 basis points.

South Korea’s $1.1 trillion economy is rebounding from the slowest growth in three years as household debt climbed to an all-time high, prompting the monetary authority to keep its key rate at 2.5 percent for the past three months. BlackRock’s stance contrasts with Pacific Investment Management Co., which sees low inflation and capital inflows supporting demand.

“Relatively high household leverage sets a floor for policy rates,” said Kim at BlackRock, which oversees $3.9 trillion globally. “Korea’s yield curve is relatively flat, and remains exposed to the Fed normalizing monetary policy.”

The gap between the nation’s two- and 10-year yields widened 44 basis points this year to 78 on Aug. 30, while the similar spread in the U.S. increased 86 basis points to 237, according to data compiled by Bloomberg.

Record Debt

Household debt rose to 91 percent of gross domestic product last year, surpassing the U.S.’s 85 percent, according to the International Monetary Fund. It reached a record 980 trillion won ($883 billion) this June, driven by lower borrowing costs after Bank of Korea Governor Kim Choong Soo cut rates three times since July last year. The central bank raised next year’s economic growth estimate in July to 4 percent, which would be the fastest pace since 2010 and an acceleration from 2013’s estimated 2.8 percent expansion.

Korea’s one-year interest-rate swap rate, the fixed cost needed to receive a floating payment, has risen 19 basis points to 2.72 percent from a four-year low of 2.53 percent in May when the central bank last cut the repo rate by 25 basis points. The comparable contract for Thailand is 2.49 percent, below the 2.5 percent policy rate, while Indonesia’s is 52 basis points higher than the benchmark 7 percent.

South Korea’s 10-year bond yield will reach 3.85 percent, the most since April 2012, by the end of the year because it moves in tandem with Treasury yields, ING Groep NV’s head of Asia research Tim Condon wrote in a report last week. Similar U.S. yields touched a two-year high of 2.93 percent on Aug. 22 and rose 115 basis points to 2.76 percent last week from a five- month low on May 1.

Upward Pressure

Kokusai Asset Management Co., which runs Japan’s biggest mutual fund and manages about $39 billion of assets, said its Korean bond holdings are lower than its benchmark as well.

“The yields may continue to face some upward pressure as the nation’s economy is recovering, and yields abroad continue to rise,” said Tatsuya Higuchi, a portfolio manager at Kokusai.

Pimco expects yields low inflation, slowing growth in China and inflows from global investors will keep yields low, Ramin Toloui, co-head of emerging markets said in an interview in Singapore last month.

Investors dumping emerging-market bonds have added $11.5 billion to holdings in South Korea in six straight months of purchases through July, Financial Supervisory Service data show. About $44 billion has left emerging-market funds since the end of May, according to EPFR Global.

Changing Tide

Pictet Asset Management, which oversees $28 billion, says the more buying the worse the potential "carnage" when the Fed starts tightening.

“The tide of Fed Quantitative Easing lifted all boats in Asia, Korea being one of the main beneficiaries,” said Wee-Ming Ting, head of Asian fixed income in Singapore. “It is over optimistic if one thinks that when the tide subsides, some boats can be left in mid-air.”

BlackRock is neutral on South Korea's currency.

The won has strengthened 2.9 percent versus the dollar this quarter, limiting 2013’s loss to 4.1 percent. It climbed 8.5 percent against the Japanese yen this year, eroding the competitiveness of exports, which account for about 45 percent of South Korea’s GDP.

Won Supported

“The won is fundamentally supported by a U.S. growth recovery, and external vulnerability has declined significantly over the past years,” BlackRock’s Kim said. “The won remains vulnerable to a potentially weaker yen though, and in our view will continue to be managed in a relatively tight range.”

President Park Geun Hye introduced a 17.3 trillion won extra budget in May, seeking to power an economy that grew 2 percent in 2012, the least in three years. Gross domestic product rose 1.1 percent in the April-to-June period from the previous quarter, the most in more than two years, central bank data showed on July 25.

Credit-default swaps insuring South Korea’s debt against non-payment fell eight basis points from the end of June and rose 16 basis points this year, according to CMA prices.

Hakan Aksoy, who helps oversee the equivalent of $5.6 billion of emerging-market and high-yield debt at Pioneer Investments, recommended avoiding longer-dated securities as inflation has bottomed out, supporting the view that no rate change is likely. Consumer prices rose 1.4 percent in July after a gain of 1 percent in June, official data show.

“There is no change expected on the benchmark policy in the near future,” said London-based Aksoy. “Due to global pressure on the long end of the curve everywhere, we believe the front end is the best place to take a position at the moment.”

--Editors: Robin Ganguly, Sandy Hendry

To contact the reporters on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

© Copyright 2020 Bloomberg News. All rights reserved.

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BlackRock Says BOK to Fed Working Against Bonds: Korea Markets
BlackRock Says BOK to Fed Working Against Bonds Korea Markets
Sunday, 01 September 2013 11:45 AM
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