South Korea’s bonds are a buy as weakness in the chip sector drives a slowdown in the economy, backing the case for an interest-rate cut in the fourth quarter, according to Shinhan Asset Management Co.
(Bloomberg) — South Korea’s bonds are a buy as weakness in the chip sector drives a slowdown in the economy, backing the case for an interest-rate cut in the fourth quarter, according to Shinhan Asset Management Co.
Both three-year and 10-year sovereign yields may slip below 3% in the second half of this year from above 3.20% as the economy continues to decelerate, said Ahn Sanghoon, head of fixed-income management at Shinhan. The yield curve will likely steepen as rate-cut bets are priced in, he added.
Samsung Electronics Co. and SK Hynix Inc. may post downbeat earnings for the first quarter, which “could certainly hurt sentiment given how interrelated the Korean economy is with semiconductors,” Ahn said in an interview. “If exports continue to fall, and inflation cools to the lower end of the 3% level for two to three straight months, a rate cut is plausible.”
Growing expectations that policy rates have peaked in Asia are leading to broad bond rallies, with some like Ahn already anticipating a shift to lower rates. The buoyant demand for regional debt helped boost an index of emerging Asian fixed-income securities by 2.5% this year, with Korea luring $8.6 billion of global inflows.
Samsung is expected to say its operating profit shrank to the least since 2009 when it releases preliminary results for the March quarter on Friday. The chip sector’s weakness has been weighing on Korean exports, which fell for six straight months.
READ: Samsung Investors Brace for Worst Profit in at Least 14 Years
Ahn, whose division overseas about 72.7 trillion won ($55 billion) of bond-related funds as the nation’s third-largest debt manager, said he’s buying the nation’s government notes whenever possible, while being more selective on the corporate sector.
The Bank of Korea kept its key rate unchanged at its February meeting for the first time in a year, reflecting growing concerns over the economy and a property market slump. Five of six analysts polled by Bloomberg so far expect the board to hold rates at 3.5% again next week, while one sees a quarter point raise.
Expectations that the Federal Reserve may halt policy tightening soon, along with the BOK’s pause, have driven a sharp decline in Korean yields over the past month.
The yield on Korean sovereign debt due in a decade has fallen nearly 60 basis points after reaching 3.84% early March. The three-year rate has declined even more during the period to 3.20%.
In the credit market, Shinhan is looking at buying bonds in the petroleum sector that’s likely to have benefited from high oil prices. It’s avoiding the construction industry and companies preparing mergers on concerns over the economy and housing market.
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