Korea Bond Bulls Unfazed by Sharpest Selloff in Five Months
(Bloomberg) — The sharpest selloff in Korean bonds in five months isn’t denting the confidence of bond bulls, as they wager for a reversal in the coming months on bets the Bank of Korea may be heading for rate cuts amid signs of a slowing economy.
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The yield on the nation’s three-year bond surged by more than 50 basis points in the last two weeks, the biggest jump since September, to 3.66% on Monday. That’s set to fall below 3% later this year on bets the BOK may cut rates twice in 2023 as falling house prices add to economic woes, according to DB Financial Investment Co. Shinhan Asset Management Co. also predicts bond gains.
“Exports aren’t likely to show strong recovery” amid uncertainties over the global semiconductor industry and China’s reopening, and “consumption will remain sluggish” with high inflation and falling real estate prices weighing on purchasing power, said Ahn Sanghoon, head of fixed-income management at Shinhan, which oversees 29.5 trillion won ($22.7 billion) of bonds. He expects the three-year yield to drop to as low as 2.9% in the second half of the year.
The Bank of Korea, which has raised rates by 300 basis points since August 2021, is seen keeping rates unchanged on Thursday, according to the majority in a Bloomberg survey, guiding traders’ outlook on yields. Globally, bonds came under pressure in recent weeks as stronger US economic data and hawkish comments from Federal Reserve officials led investors to rethink the outlook for rates.
Inflation won’t slow down easily, but it will eventually, said Han Sooil, chief investment officer of the fixed-income division at NH Amundi Asset Management Co., which oversees 20.3 trillion won of bonds. Yields are headed lower, so consider buying bonds whenever they weaken, Han said.
Both Shinhan and NH Amundi expect the BOK to cut interest rates once by 25 basis points this year. Their plan is to increase their positioning on bond durations, while Shinhan is looking at investing more in credit.
“The economy is weakening everywhere, but in Korea there is also the housing market problem,” said Moon Hongcheol, a fixed-income and FX strategist at DB, adding he’d suggest buying bonds in the next one or two months.
(Updates yield levels in the second paragraph)
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