The gap between South Korea’s sovereign and corporate bond yields may narrow for a fourth year as Europe’s deficit crisis recedes, spurring appetite for riskier debt, according to Mirae Asset Global Investments.
The premium on three-year top-rated corporate bonds over similar-maturity government securities shrank 14 basis points in the year to March 14 to 38 basis points, the lowest since April 2010, according to latest figures from Koscom Corp., which provides financial data from Korea Exchange Inc. The difference narrowed every year since 2009. Mirae Asset, South Korea’s second-biggest fund manager, predicts the spread will tighten by another five to 10 basis points within this year.
“With Europe’s sovereign-debt crisis easing and more investors looking at higher-yielding bonds, I see room for further narrowing,” said Choi Jin Young, the Seoul-based head of the fixed-income management team at Mirae Asset, which oversees 62.1 trillion won ($55 billion). Choi said in a March 13 interview he plans to remain overweight in corporate debt “for some time,” suggesting greater ownership than the securities’ weighting in benchmark indexes.
South Korea’s corporate borrowing costs declined because investors sought higher-yielding debt as the central bank held rates unchanged since June to support economic growth. The yield for Kia Motors Corp. (000270) notes due November 2017 fell five basis points this year to 4.12 percent, according to prices from Nice Pricing Services. The rate touched 4.09 percent on Feb. 28, the lowest since the securities began trading in November. Kia, the nation’s second-biggest auto maker, is rated AA, the second- highest investment grade at Nice Pricing.
KB Asset Management Co., a unit of South Korea’s second- largest bank holding group by assets, has lowered its holdings of corporate debt to neutral after favoring an overweight position in 2011, according to Moon Dong Hoon, who oversees 11 trillion won as the company’s managing director in charge of fixed-income in Seoul.
“Increased liquidity in the market has supported corporate bond demand, but with spreads having narrowed so far, the prices aren’t as attractive as before,” Moon said in a phone interview on March 14. He predicts the gap between yields on corporate and government bonds will be little changed in the next couple of months.
The yield on South Korea’s three-year won sovereign bonds increased 18 basis points, or 0.18 percentage point, this year to 3.52 percent on March 14, according to data compiled by Bloomberg. The average rate for AAA corporate notes advanced three basis points to 3.89 percent, Koscom data show. The difference between three-year sovereign and BBB+ corporate yields shrank 22 basis points to 376 this year, Koscom prices show.
South Korean companies’ overseas sales rose in February by the most in six months amid progress in solving the European debt crisis. Shipments to the European Union climbed 30.4 percent from a year earlier in the first 20 days of February, while sales to China, the biggest buyer of South Korean goods, increased 14.5 percent, government data showed on March 1.
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