Bond Funds Jump Into Korea on Bets Virus Will Spur Rate Cut

(Bloomberg) -- Global funds are gorging on South Korean bonds as concerns the coronavirus outbreak will hurt the trade-reliant economy boost bets for a rate cut.

Foreign investors have been net buyers for 21 straight days through Feb. 10, according to data from the Financial Supervisory Service. Morgan Stanley and JPMorgan Chase & Co. both say the Bank of Korea could lower its policy rate by 25 basis points at the end of February.

Rate-cut bets are getting stronger as Chinese measures to contain the viral outbreak disrupt supply chains to pose a threat to global economic growth. Just last month, a U.S.-China trade deal and signs of a recovery in the key chip industry saw the BOK sound more upbeat about the economy.

“Markets now agree the BOK will have to ease once for sure because the virus is most likely to hit Asia’s growth,” said Lee Mi Seon, an analyst at Hana Financial Investment Co.

The forecasts for easing when the BOK meets on Feb. 27 are picking up pace, with the banks joining an earlier call by Orange Life Insurance Ltd. Economists had earlier predicted that the BOK will sit out the virus outbreak due to concerns about a real estate bubble and rising household debt.

Foreign funds have bought $7.5 billion of Korean government bonds from Jan. 9. The benchmark 10-year yield has slipped 9 basis points over that period.

Traders have been ratcheting up bets that central banks in Asia will be forced to ease as a potential economic slowdown in China takes a toll on other countries in the region due to their stronger trade links. The Bank of Thailand and Bangko Sentral ng Pilipinas cut rates last week.

Harder Hit

“The effect on Korea’s macro situation would likely be via a first-round impact from tourism/travel, retail sales and production activity disruption, and a second-round impact from spillover effects from China’s slowdown,” Morgan Stanley analysts wrote in a report last week.

An extended Lunar New Year shutdown at Chinese plants has taken a toll on South Korean companies. Korea’s Kia Motors Corp. said Monday it halted output at three of its plants as car parts supply from China had been disrupted, joining Hyundai Motor Co. in announcing suspensions.

Investors should increase the duration of their bond holdings at least until uncertainties related to the virus are lifted, according to Macquarie Investment Management Co.

If the coronavirus is contained, then the BOK will probably stay on hold this month, though a cut will be on the cards in March “should the situation turn pessimistic,” said Lee Soojun, head of fixed income and chief investment officer at Macquarie’s Seoul office.

To contact the reporter on this story: Hooyeon Kim in Seoul at hkim592@bloomberg.net

To contact the editor responsible for this story: Tan Hwee Ann at hatan@bloomberg.net

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