Why South Korean bonds are luring buyers despite its currency's poor run

Foreign investors piling into South Korean bonds have made them the second-best performers in emerging Asia in the past six months. The coming week may give them more reason to keep buying.

Seen as a haven from this year’s sell-off in emerging-market assets, the nation’s debt has drawn $45.6 billion from global funds this year. A weakening won -- the currency is Asia’s worst performer this quarter -- and a November rate increase by the Bank of Korea, its first in a year, have failed to deter overseas buyers.

That’s because the nation’s economic outlook still remains uncertain, with any additional rate hikes seen far from given and markets actually pricing in the possibility of a cut. Korean bonds have also benefited from a global investment shift in favor of fixed income as concerns about world growth rise. The notes have returned 4.2 percent since the end of June.

“Foreign investors bought South Korean bonds this year looking at the nation’s high credit rating and current-account surplus,” said Kim Sanghoon, a fixed-income strategist at KB Securities Co. “These will not change in the new year, hence bond purchases are expected to continue.”

South Korea’s notes may serve as haven assets for investors next year as financial-market volatility could increase, according to HSBC Holdings Plc, the nation’s biggest offshore bond arranger.

Business Surveys

Against such a backdrop, should data on Korean business surveys for manufacturing and non-manufacturing conditions show a continuation of the recent downtrend -- readings for December matched or fell to the lowest since early 2017 -- bond bulls may be encouraged to boost holdings. January figures are due on Dec. 28.

Just a few days back, Finance Minister Hong Nam-ki and BOK Governor Lee Ju-yeol shared a view that economic conditions next year will not be good, as external uncertainties remain high and investment and employment are sluggish. The BOK next reviews policy on Jan. 24.

But not everyone is optimistic about the debt outlook. Paik Yoon-min, a fixed-income analyst at Kyobo Securities Co., believes that yields on Korean bonds may actually rise as the securities “are currently being overbought, even considering next year’s slow sentiment.”

“While most investors are looking at slower growth next year, the market is overreacting to such projections,” he said.