Global Bond Tour Sparks Debate on Record Reserves: Korea Markets

May 21, 2014 10:30 pm ET

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May 22 (Bloomberg) -- South Korea’s finance ministry is starting a six-city tour to drum up interest in a possible global bond sale, just as debate emerges over adding to the nation’s $356 billion in currency reserves.

Investor meetings on a sale of dollar and euro debt are due in Boston, New York and Paris this week, followed by Amsterdam, Frankfurt and London, said a person familiar with the matter who asked not to be identified. The Korea Capital Market Institute said the fundraising is questionable given record reserves. Dollars stockpiled to manage the won have lost 39 trillion won ($38 billion) in local-currency terms since the start of 2009, Morgan Stanley estimated last month.

“There is debate whether further accumulation of foreign reserves is needed at this stage,” Hyun Suk, a Seoul-based research fellow at Korea Capital Market Institute, said in a May 16 interview. “Proceeds from the sovereign bond sale will be added to reserves and re-invested in assets like Treasuries, resulting in negative margins.”

Selling offshore bonds would boost foreign-currency holdings at a time when the central bank is suspected to have intervened to check the won’s advance to a six-year high, protecting an export-driven economic recovery. South Korea’s last sale of dollar debt was in September and the extra yield on the securities over U.S. Treasuries has since halved. The nation hasn’t sold euro notes since November 2006.

‘Scarcity Value’

“Korea doesn’t issue foreign-currency government debt that often, so a sovereign deal offers fantastic scarcity value,” Sergey Dergachev, who helps oversee about $10 billion in emerging-market debt as a senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said in a May 16 e- mail interview. The asset manager holds South Korea’s dollar bonds and has “strong” interest in the possible sale, he said.

The meetings will help gauge interest in offshore bonds and exchange views on the economy, Yoon Tae Sik, the finance ministry’s director for international financial policy, said in a May 19 telephone interview. Whether an issuance will take place, and its size and timing, is undecided, he said.

The extra yield investors demand to hold South Korea’s latest 10-year dollar bonds has dropped 54 basis points since they were issued in September to 61 basis points yesterday, data compiled by Bloomberg show.

Lower Spreads

The lower spreads allow the government to repay costlier overseas debt, Wai Ho Leong, a Singapore-based economist at Barclays Plc said in an e-mail interview yesterday. About $2.5 billion of sovereign foreign-currency notes mature this year, data compiled by Bloomberg show.

Credit-default swaps insuring the nation’s sovereign debt against non-payment for five years fell to a five-month low of 56 basis points on May 14 compared with 82 for China, according to CMA prices. Both countries are rated Aa3 by Moody’s Investors Service, the fourth-highest investment grade.

“Korea is one of the improving credit stories in the emerging-market universe,” Union Investment’s Dergachev said.

The Bank of Korea raised its 2014 growth forecast to 4 percent from 3.8 percent on April 10, citing rising exports and improving domestic consumption. The Organization for Economic Cooperation and Development this month cut its world-growth estimate to 3.4 percent from 3.6 percent.

The U.S. 10-year Treasury yield has fallen about half a percentage point this year to 2.51 percent yesterday as the Federal Reserve signaled it will keep borrowing costs near zero to aid the recovery in the world’s largest economy. The yield on comparable South Korean local-currency debt has dropped 20 basis points to 3.38 percent, data compiled by Bloomberg show.

‘Additional Juice’

“With the global growth outlook increasingly uncertain, and Treasury yields trending lower, investors are once again scrambling for safe-haven assets that provide some additional juice,” Mark Reade, an analyst at Mizuho Securities Asia Ltd. in Hong Kong, said in a May 20 e-mail interview. “High quality Asian names such as Korea’s sovereign and quasi-sovereign issuers should benefit from extremely strong investor demand.”

The won reached 1,020.97 per dollar on May 9, the strongest since August 2008. The currency’s 3.7 percent advance this quarter, the most among 31 major exchange rates tracked by Bloomberg, prompted central bank Governor Lee Ju Yeol and Trade Minister Yoon Sang Jick to say this month the appreciation will burden businesses and hurt exports.

Dollar Supply

Suspected intervention this month has weakened the won, which closed at 1,026.97 per dollar yesterday, and is adding to reserves at a time with South Korea is awash with dollars.

The current-account surplus widened to $7.35 billion in March and foreign-currency deposits held by residents reached an unprecedented $58.42 billion in April, official figures show. Overseas funds boosted holdings of local equities and won- denominated debt by 1.97 trillion won ($1.9 billion) this year as of April 30, data from the financial regulator show.

To tap the supply, the government urged state-run companies to raise dollars in the domestic market by issuing so-called Kimchi bonds, while also starting to lend to local firms from its foreign-exchange stabilization fund. South Korea is also considering measures to reduce the current-account surplus to curb the won’s appreciation, Kim Seong Wook, a director at finance ministry, said May 12.

“The government should be focusing on how to manage the foreign-exchange reserves rather than issuing more offshore bonds,” Lee Phil Sang, a professor of economics at Seoul National University, said in a May 16 interview. “Raising funds abroad isn’t a priority for South Korea at the moment.”

--With assistance from Cynthia Kim, Eunkyung Seo and Kyung-Jin Kim in Seoul.