Woori Asset Management Co., a unit of South Korea’s biggest financial services group, favors debt issued by Korean state-run companies over sovereign and riskier corporate notes on signs the global economy is recovering.
The yield premium for ten-year AA agency securities over similar-maturity government debt narrowed 16 basis points this year to 75 basis points on April 2, the least since August 2010, according to Koscom Corp., which provides financial data from Korea Exchange Inc. Woori Asset predicts the yield gap may shrink another 20 basis points in 2012 due to their relative safety compared with other corporate notes and their yield advantage over sovereigns.
“With the U.S. and Europe both pursuing accommodative policies, we will continue to see mild recovery in the global economy supported by increased liquidity,” Kim Kihyun, who oversees 12.5 trillion won ($11.1 billion) as head of fixed- income at the company, said in an April 2 interview in Seoul. “Compared with spreads for other notes, the yield premium for quasi-sovereign notes with longer-dated maturities has room to narrow.”
South Korea’s sovereign yields rose this year as improved economic data boosted demand for riskier assets such as stocks. A U.S. index of factory output for March beat economists’ estimates, according to official data released April 2, while a Chinese purchasing managers’ index reached a one-year high, according to an April 1 report.
The rate on 3.25 percent government bonds due December 2014 increased 27 basis points, or 0.27 percentage point, to 3.58 percent on April 2, according to data compiled by Bloomberg. The rate may advance another 20 basis points this year, although further gains will be limited as the central bank will probably keep borrowing costs unchanged in 2012, Kim said.
Bonds issued by Korea Land & Housing Corp. due May 2017 yielded 4.10 percent on April 2, 38 basis points more than similar-maturity government debt, according to prices from Nice Pricing Services. The gap narrowed 11 basis points this year.
The liquidity for quasi-sovereign securities is good, Kim said, adding that this would “be positive when we consider an exit strategy.”
Moody’s Investors Service raised South Korea’s credit- rating outlook to positive from stable on April 2, citing “very strong and improving fiscal fundamentals.” Factory output expanded 14.4 percent in February from a year earlier, the most since August 2010, according to a government report on March 30. The Bank of Korea held the benchmark interest rate at 3.25 percent for a ninth month in March.
Woori Asset also plans to start a leveraged exchange-traded bond fund this year in response to rising demand for asset diversification, Kim said.
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