Bloomberg News

Buy Korea Bond Futures, Pay Interest-Rate Swap, Macquarie Says

October 05, 2011

Oct. 6 (Bloomberg) -- Investors should buy futures on South Korea’s three-year government bonds and pay the fixed rate on similar-maturity interest-rate swaps as global funds’ sales of won debt subside, according to Macquarie Group Ltd.

The yield on the most-active three-year bond future, which expires in December, was at a six-week high of 3.62 percent at the end of last month, 0.18 percentage point higher than the rate on non-deliverable three-year swaps at the time, according to data compiled by Bloomberg. In the contracts, investors pay a fixed rate to receive the floating 91-day certificate of deposit rate. The gap narrowed to 0.11 percentage point as of 10:48 a.m. in Seoul. Macquarie says it may reach zero.

“Foreign selling in Korea has been limited, especially compared to other emerging markets like Indonesia,” Singapore- based strategist Matt Huang wrote in a report dated yesterday. “Current levels are attractive to put on a spread-tightening trade.”

South Korea’s Financial Supervisory Service said yesterday overseas investors cut their stake in local-currency debt by 2.5 billion won ($2.1 million) last month. Global funds reduced their ownership of Indonesia’s local-currency sovereign bonds by 29 trillion rupiah ($3.3 billion), official figures show.

“Foreign selling in South Korea’s bond futures contracts suggests the pace of selling will likely subside,” Macquarie said in the report. The sale of almost 46,000 contracts over the last month indicates the selloff is reaching an end based on past two-week patterns, according to the report.

European funds were among the largest sellers of Korean debt in September, the FSS data showed, with U.K. and France- based investors reducing their holdings by 1.75 trillion won. That was mitigated by purchases of 1.35 trillion won by Thai and U.S. funds.

“Korea has not been immune to selling but rather enjoyed more balanced flows from foreigners,” Macquarie said in the report.

--With assistance from David Yong in Singapore. Editors: James Regan, Sandy Hendry

To contact the reporter on this story: Jiyeun Lee in Seoul at

To contact the editor responsible for this story: Sandy Hendry at

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