South Korean inflation-linked bonds are overpriced as new policies including free school lunches will slow consumer-price gains, according to SK Securities Co.
Inflation (KOCPIYOY)will ease to 2.9 percent in March as university tuition fees drop 4.2 percent, several regions adopt free meals for students, and the government expands support for kindergarten payments, Yum Sang Hoon, a fixed-income analyst at SK Securities in Seoul, wrote in a report today. That prediction is lower than that of all nine economists surveyed by Bloomberg, with a median estimate of 3.2 percent, compared with 3.1 percent in February. The data are due April 2.
“Education fees account for 11 percent of consumer prices in Korea, and March typically reports fast inflation as the school year starts,” Yum wrote. “This year, March inflation will be slower, despite oil-price spikes, due to welfare policies.”
South Korea’s 1.5 percent inflation-linked bonds due June 2021 yielded 0.98 percent, compared with 4 percent on similar- maturity conventional sovereign notes, according to data compiled by Bloomberg.
The inflation linkers are overpriced, and the so-called breakeven rate can fall to 280 basis points from 302, according to Yum. The rate measures the gap between inflation-linked and conventional bond yields and indicates expectations for average annual consumer-price gains until the debt matures.
Inflation linkers 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.
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