Bloomberg News

Industrial Bank of Korea to Bet on Yen Gains With Japanese Bonds

November 13, 2011

Nov. 11 (Bloomberg) -- Industrial Bank of Korea, the largest lender to small and mid-sized companies in South Korea, will start investing in Japanese government bonds next year in a bet the yen will rally as the global economy struggles.

Chungkeun Oh, a trader for the bank in Seoul, said he will add so-called JGBs to his portfolio in addition to the U.S. Treasuries and euro-denominated bonds he already handles. The bank may also begin trading the debt of Australia and other investment-grade sovereign markets in 2012 as it seeks to expand its range of businesses, he said.

The yen has rallied 6.6 percent over the past six months, the best performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It climbed to a post-World War II high of 75.35 per dollar on Oct. 31, driven by investors seeking a haven from a debt crisis in Europe and the U.S.’s failure to bring down its jobless rate from around 9 percent. The surge prompted Japan to sell the currency in a bid to curb the impact of yen gains on exporters.

“If you’re looking for currency appreciation, especially when there are bad headlines coming out of Europe and the U.S. economy isn’t expected to pick up any time soon, then you can choose JGBs,” Oh, 42, said in a telephone interview today. “From the perspective of yield, JGBs are not so attractive because yields are so low.”

Japanese Yields

The yen was little changed today at 77.57 per dollar as of 2:22 p.m. in Tokyo, having weakened from its strongest level after the government sold the currency.

Japan’s 10-year yield was 0.97 percent. Only Switzerland’s rate of 0.89 percent is lower among the 32 government debt markets tracked by Bloomberg.

Japanese bonds have returned 2 percent this year, versus 8.6 percent for Treasuries and 9.1 percent for German bunds, according to Bank of America Merrill Lynchindexes.

After accounting for currency changes, U.S. and South Korean investors both earned 6.7 percent in Japanese government debt this year, the indexes show. The yen has climbed 9.3 percent against the won in the past six months, the largest gain among the 16 most-traded peers tracked by Bloomberg.

Foreign investors hold 5 percent of Japan’s government bonds, according to the Ministry of Finance. The debt market, equivalent to $11.5 trillion, is the biggest in the world, according to data compiled by Bloomberg.

By contrast, money managers outside the U.S. own almost half of $9.75 trillion of publicly traded U.S. debt.

Europe’s Debt Woes

Europe’s debt crisis intensified this week as investors sent Italian bond yields surging to a euro-era record on concern the nation will have trouble paying back its borrowings. Greece is working to secure aid payments to avoid an economic collapse.

U.S. joblessness is “painfully high,” with more than two- fifths of unemployed people out of work for longer than six months, Federal Reserve Chairman Ben S. Bernanke said yesterday in a speech in El Paso, Texas. That’s “by far the highest ratio since World War II,” he said.

Demand for the safest assets helped push 10-year Japanese bond yields to a one-year low of 0.96 percent yesterday.

“The JGB market is the biggest in Asia and liquidity is good,” Oh, said in a separate telephone interview on Nov. 4. “Yields should be quite stable. It will be a low-yield environment going forward.”

--Editors: Benjamin Purvis, Jonathan Annells

%KRW %JPY

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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