(Bloomberg) – The sharpest sell-off in Korean bonds in five months is not hurting bond bulls’ confidence as they bet on a trend reversal in the coming months, betting that the Bank of Korea could be headed for rate cuts amid signs of a rate cut slowed economy.
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The yield on the three-year government bond rose more than 50 basis points over the past two weeks, the biggest jump since September, to 3.66% on Monday. That reading is expected to fall below 3% later this year on bets that the BOK could cut rates twice in 2023 as falling house prices contribute to economic woes, according to DB Financial Investment Co. Shinhan Asset Management Co. also forecast bond gains.
“Exports are unlikely to rebound strongly amid uncertainties about the global semiconductor industry and China’s reopening,” and “consumption will remain sluggish” as high inflation and falling house prices weigh on purchasing power, said Ahn Sanghoon, head of fixed-line operations. Income management at Shinhan, which manages 29.5 trillion won ($22.7 billion) in bonds. He expects the three-year yield to fall to as low as 2.9% in the second half of the year.
The Bank of Korea, which has hiked rates by 300 basis points since August 2021, will leave rates unchanged on Thursday, according to a majority in a Bloomberg poll that guides traders’ outlook for yields. Global bonds have come under pressure in recent weeks as stronger US economic data and hawkish comments from Federal Reserve officials prompted investors to reconsider the outlook for interest rates.
Inflation won’t slow down easily, but it will eventually, said Han Sooil, chief investment officer of fixed income at NH Amundi Asset Management Co., which manages 20.3 trillion won in bonds. Yields are trending down, so consider buying bonds whenever they weaken, Han said.
Both Shinhan and NH Amundi expect the BOK to cut interest rates by a one-time 25 basis points this year. Her plan is to increase her positioning on bond maturities, while Shinhan plans to invest more in credit.
“Economy is weak everywhere, but in Korea there is also the housing market problem,” said Moon Hongcheol, a fixed income and FX strategist at DB, adding he would suggest borrowing in the next month or two buy.
(Updates yield levels in second paragraph)
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