Nov. 25 (Bloomberg) -- South Korea’s biggest bond investors are favoring corporate debt as a drop in sovereign yields saps demand for government securities.
Woori Asset Management Co., a unit of South Korea’s largest financial group by assets, and Korea Life Insurance Co., the nation’s second-largest life insurer, said they are adding to their holdings of corporate bonds.
The extra yield investors demand to hold five-year corporate debt rated AA- over government securities was 99 basis points on Nov. 23, from a 15-month high of 107 on Oct. 20, according to Koscom Corp., which provides financial data from Korea Exchange Inc.
“Most Korean companies rated over A are affiliates of large corporate groups and have very low risk of default even if the economy slows,” Kim Kihyun, who manages 13 trillion won ($11.3 billion) of debt as head of fixed-income at Woori Asset in Seoul, said in an interview on Nov. 23. Woori started boosting its corporate holdings last month and plans to stay “overweight” through the first half of next year, he said.
The Bank of Korea kept borrowing costs unchanged at 3.25 percent on Nov. 11 as slowing domestic growth and Europe’s deepening debt crisis prompted policy makers to pause their fight against inflation. The yield on the government’s 3.5 percent bond due September 2015 rose nine basis points in the two days after the review to 3.56 percent. It has since dropped to 3.48 percent yesterday as some investor bet on a rate cut.
The relative yield for five-year notes issued by Korea Finance Corp, a state-run institution that helps local firms get loans was 37 basis points higher than similar-maturity government debt on Nov. 23 from a 2011 high of 43 on Nov. 10.
‘Achieve Target Returns’
Korea Life Insurance plans to continue adding corporate bonds rated over A and quasi-sovereign debt until government yields rise to more attractive levels, Kim Sun Je, vice president of the separate account department in Seoul, said in an interview yesterday. Kim said he plans to buy sovereign debt when benchmark five-year yields reach 4 percent from the current 3.48 percent.
“It became difficult to achieve target returns with government bonds, and fund managers who help manage Korea Life assets are asking me for permission to buy company debt,” said Kim, who oversees 12 trillion won of debt.
Dongbu Securities Co. recommended investors increase corporate holdings through the first three months of next year, until expectations for a rate cut increase and spreads start to widen, Seoul-based chief fixed-income strategist Shin Dong Jun and other analysts wrote in a report released yesterday. The difference between three-year corporate notes rated AA- and government debt will narrow to an average of 55 basis points next year from the current 84, according to the report.
--Editors: Andrew Janes, Sandy Hendry
To contact the reporters on this story: Jiyeun Lee in Seoul at firstname.lastname@example.org;
To contact the editor responsible for this story: Sandy Hendry at email@example.com