Hedging Costs at '09 High Drive Korea Insurers to Local Debt

(Bloomberg) -- South Korean insurers are increasingly looking at long-dated bonds at home as rising hedging costs hurt their appetite for foreign assets, putting downward pressure on lengthier won debt yields.

Shinhan Life Insurance Co. has been buying long debt at home as much as possible while reducing U.S. dollar exposure due to high hedging costs, said an official at the firm who asked not to be identified. Insurers bought all 30 billion won ($28 million) of 30-year note issued by state-owned Korea South-East Power Co. this month, a person familiar with the matter said.

Driving the demand for long-term securities are stricter insurance capital rules that require the firms to extend the maturity of assets. Foreign securities have become less attractive as a way to lengthen the maturity of their holdings, as the cost to hedge dollar-denominated investments back into won surged to near nine-year highs.

“Rising hedging costs are a real worry for insurers,” said Moon Hong-cheol, a fixed-income strategist at DB Financial Investment Co. in Seoul. “It’s become really difficult to invest in U.S. dollar bonds, and insurers are forced to buy more won debt with super-long maturities as a result.”

That’s helped drag down Korea’s 30-year bond yields to below 10-year yields again this week.

Hedging Costs at '09 High Drive Korea Insurers to Local Debt

A widening gap between U.S. and Korean interest rates is pushing up hedging costs for the Asian nation’s investors.

A measure called three-month dollar-won forward points fell to the lowest since 2009 last month. That’s resulted in Korean investors having to sacrifice around 1.3 percentage points in annual yield to hedge using rolling three-month forwards for a year, when buying in U.S. dollars and hedging back to Korean won, data compiled by Bloomberg show.

Insurer demand for longer local debt is encouraging borrowers to issue lengthier notes.

LG Electronics Inc. is planning to sell bonds including 15-year notes next month, a person familiar with the matter said, after selling 20-year securities at 4.195 percent via private placement early this month, its longest-ever debt.

“The high hedging costs will likely continue, considering that there isn’t a strong motivation for a rate hike in Korea while the U.S. is on track to raise rates,” said Lee Kyoung-rok, credit analyst at Mirae Asset Daewoo Co. in Seoul.

©2018 Bloomberg L.P.