Korean Dollar Bonds Rally as Investors Switch Out of China

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Bonds from South Korean issuers are benefiting from their safe haven status as some investors turn away from Chinese debt after a spate of defaults.

Yield premiums on Korean corporate dollar notes tightened 17 basis points in the past month, while spreads on high-grade debt from Chinese issuers sold in the U.S. currency increased 3 basis points, Bloomberg Barclays indexes show. Korean bonds are also outperforming the Asian regional index.

Korean Dollar Bonds Rally as Investors Switch Out of China

Defaults by several Chinese state-linked firms on yuan bonds last month are being viewed as a sign that policy makers are less willing to offer debt-burdened firms a lifeline now than at start of the pandemic. A recent order by the U.S. barring American investments in Chinese firms owned or controlled by the military, and the threat of more actions, may also be spurring demand for Korean bonds.

Korea’s economy grew at a faster pace than initially estimated last quarter, with rising exports supported by robust demand for tech devices.

Many Korean bonds have high investment-grade ratings, helped by the sovereign’s AA tier credit scores. Even after a tightening of spreads on dollar notes from the nation, Korean bonds continue to offer an “attractive premium” compared with U.S. peers, according to Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd.

©2020 Bloomberg L.P.

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