South Korean bonds that protect investors from rising consumer prices will beat returns on fixed-income debt on speculation the Federal Reserve?s money printing will stoke global inflation, says SK Securities Co.
Ten-year inflation-linked notes will return about 7 percent by May, 2 percentage points more than regular securities of the same maturity, Yum Sang Hoon, a Seoul-based fixed-income strategist at SK Securities, said in an Oct. 29 interview.
Increases in consumer costs, which erode the attraction of fixed-income investments, will accelerate to 4.5 percent in the first-half of 2011, more than the Bank of Korea?s target of between 2 percent and 4 percent, Yum said. The Fed bought $1.7 trillion of debt from December 2008 through March to help end a recession in the U.S. and economists at Bank of America Corp. and Goldman Sachs Group Inc. predict a further $500 billion of asset purchases will be announced after a policy meeting this week.
?The only ones who will survive that wave of money will be those holding inflation-linked bonds,? Yum said. ?Quantitative easing will stoke more inflation fears.?
The yield on South Korea?s 2.75 percent inflation-linked bonds due June 2020 fell 10 basis points last month to 1.72 percent, according to Barclays Plc prices. The yield on the 5 percent notes due June 2020 that don?t offer protection against inflation climbed 25 basis points to 4.37 percent.
The rate on the 2.75 percent note fell four basis points to 1.68 percent as of 9:42 a.m. in Seoul after the government today reported faster-than-expected inflation. The rate on the 5 percent security fell three basis points to 4.34 percent.
Faster Inflation
South Korea?s consumer prices rose 4.1 percent in October from a year earlier, the biggest increase in 20 months, according government data show. The median forecast of economists surveyed by Bloomberg was for a 3.4 percent gain.
Inflation-linked bonds tend to have lower yields than conventional debt because the principal increases annually at a rate tied to the consumer price index.
?Inflation is really going to take off next year,? Yum said. ?Even if the central bank raises rates right now, it won?t be able to contain prices immediately.?
The Bank of Korea kept its benchmark interest rate unchanged in October at 2.25 percent, after raising it from a record-low 2 percent in July.
The Ministry of Strategy and Finance sold 10-year inflation-linked bonds at a 1.57 percent yield at its monthly auction in October, the lowest rate since the government in June sold such securities for the first time in also two years. The finance ministry will open bidding for this month?s sale on Nov. 15.
To contact the reporter on this story: Frances Yoon at fyoon2@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.
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