Korea Treasury Bonds: Outperformance ahead


We think Korean bonds may outperform US Treasurys in the short term as the Fed tightens rates this year; the strength of the won may actually deter the Bank of Korea from frontloading rate hikes.
Eugene Leow19 Feb 2018
  • There is significant scope for Korean bonds to outperform US Treasurys in the short term
  • Price pressures in Korea have fallen significantly over the past few months.
  • Comparatively, the US may be facing upside risks to inflation
  • In short, Fed tightening may be much more compelling than Bank of Korea tightening this year
  • Moreover, the strength of the won may actually deter the BoK from frontloading rate hikes
Photo credit: AFP Photo






There is significant scope for Korea Treasury Bonds (KTBs) to outperform US Treasurys (USTs) in the short term. The KTB curve has re-correlated with the UST curve in recent months. In terms of the level and steepness, both curves are virtually identical up to the 10Y tenor. Beyond that, there is a divergence with 30Y USTs yielding 40bps more than 30Y KTBs. Some of the yield gap is probably aggravated by the inversion in the 10Y/30Y segment of the KTB curve. We think that 2Y-10Y KTBs are likely to fare better than comparable USTs in the coming months.

Price pressures in Korea have fallen significantly over the past few months. Headline CPI is now at 1.0% YoY in January, compared to 2.6% in August. Going forward, the strength of the Korean won (keeping imported inflation muted) and favourable base effects should keep a lid on headline CPI. Comparatively, the US may be facing upside risks to inflation. US CPI has stayed at-or-above 2.0% YoY since September. In addition, core CPI and wages appear to be picking up.



In short, Federal Reserve tightening may be much more compelling than Bank of Korea (BoK) tightening this year. Moreover, the strength of the won (the USD/KRW is down by 6.7% since October) may actually deter the BoK from frontloading rate hikes. Our forecasts also reflect a much more dovish tightening profile for the BoK (three hikes by end-2019) compared to the Fed (five hikes).
Lastly, there have been signs of thawing tensions between South Korea and North Korea. Investors were understandably spooked in 2017 when relations between the two sides were aggravated by the North’s multiple missile launches. Unsurprisingly, foreign ownership of KTBs took a tumble over the past six months. However, with cross currency basis swaps (2Y-5Y) incredibly attractive, offering between 62-67 bps in pickup, we think that USD-based investors may return.

To read the full report, click here to Download the PDF.

  Eugene Leow
Rates Strategist - G3 & Asia
eugeneleow@dbs.com

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only.  It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose.  Opinions and estimates are subject to change without notice.  The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information.  Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities.  Foreign exchange transactions involve risks.  You should note that fluctuations in foreign exchange rates may result in losses.  You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such.  Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof. 

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.  The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.