Bloomberg News

South Korea’s Inflation Bonds Decline on Price Basket Change

October 26, 2011

Oct. 26 (Bloomberg) -- South Korea’s inflation-linked bonds dropped the most this month after the government said last week it will remove gold rings from the consumer-price index from November.

“Inflation-linked bonds have lost attractiveness as revised measurements will make inflation lower,” said Kim Dong Whan, a fixed-income strategist at HI Investment & Securities Co. in Seoul. “Inflation tends to slow when the government changes the basket of goods.”

The Asian nation has a tradition of giving gold rings as a present to children on their first birthdays and rising prices for the precious metal have contributed to an inflation rate which has exceeded the government’s 4 percent target for the past nine months. Finance Minister Bahk Jae Wan told lawmakers on Oct. 21 that removing the item from the CPI basket should result in inflation dropping below 4 percent.

Yields on South Korea’s 1.5 percent inflation-linked bonds due June 2021 jumped 10 basis points to 0.86 percent, according to Koscom Corp., which provides financial data from Korea Exchange Inc. The rate rose 22 basis points, or 0.22 percentage point, since Oct. 20, before the government’s price-basket announcement. Yields on South Korea’s 4.25 percent securities due June 2021 dropped two basis points to 3.92 percent.

Consumer prices rose 4.3 percent in September from a year earlier, compared with 5.3 percent in August, official data show. The so-called breakeven rate, which is indicative of traders’ expectations for average annual inflation until the debt matures, on 2.75 percent inflation-linked debt due March 2017 narrowed eight basis points this month, according to data compiled by Bloomberg.

Inflation-linked securities typically have lower coupons than conventional debt because the principal increases at the same rate as the consumer-price index. Korean linkers pay interest twice a year.

--Editors: Andrew Janes, Simon Harvey

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

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


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