Asia’s Favorite Bonds to Lure More Investors Amid Rate Cut Bets

(Bloomberg) -- Foreign investors are likely to keep flocking into South Korean bonds as cooling inflation combined with growing concerns over the nation's key tech sector pressure the Bank of Korea to start easing policy as early as this year.

Offshore markets have already scooped up a net $13.8 billion of South Korean bonds this year, outstripping inflows into any other Asian country tracked by Bloomberg. The funds purchased the nation's debt for 35 straight days through March 6 to April 21, marking the longest streak of net buying since July 2021.

South Korean trade and CPI print due this week may fuel bets of an interest-rate cut in the latter half of the year, following data that showed inflation eased more than forecasted in March. Expectations for FTSE Russell to add South Korean bonds to its flagship bond index as early as September are also adding to the market optimism. 

“Korea was among the first to hold rates this year, after starting to hike ahead of most other central banks — meaning it could be the first to pivot too,” said Ahn Jae-kyun, a fixed-income analyst at Shinhan Investment Corp., who expects the BOK to start cutting rates in October. 

Growth trend looks weaker compared to the rest of the world, and the currency is deemed excessively weak which explains the deluge of inflows, Ahn said. 

Despite the bond inflows, the Korean won — likely weighed by seasonal dividend-related outflows and weak trade — has dropped more than 6.2% against the dollar this year and is the worst performing currency in Asia. Analysts are expecting the won to strengthen to an average of around 1,230 per dollar by year-end, according to an average forecast in a Bloomberg survey. It closed at 1,339.03 on Friday.

As Korea's crucial chip sector slows down, analysts have consistently wagered for rate cuts this year with Nomura predicting as many as three cuts.

Korea has been buffeted by a sixth-month drop in exports marked by a record trade deficit in January amid falling semiconductor prices. Lurking credit worries linked to the nation's shaky housing market and growing tensions between US and China — Korea's two largest trading partners — have also added to risks. 

“There is a chance for credit risks to burst out again with a number of real estate project financing loan expirations concentrated in the first half of the year,” said Kwon Keejoong, a fixed-income analyst at IBK Securities Co. Kwon expects foreign bond inflows to continue this quarter ahead of an anticipated rate cut at the end of the year.

Here are the key Asian economic data due this week: 

• Monday, May 1: Jibun Bank Japan PMI manufacturing, Japan consumer confidence, Korea trade data, India S&P PMI manufacturing
• Tuesday, May 2: Japan monetary base, Korea CPI, Korea S&P PMI manufacturing, Indonesia S&P PMI manufacturing, Indonesia CPI, Thailand S&P PMI manufacturing, Thailand business sentiment, Malaysia S&P PMI manufacturing, Philippines S&P PMI manufacturing, Taiwan S&P PMI manufacturing, Hong Kong GDP
• Wednesday, May 3: India S&P PMI composite, Thailand CPI, Malaysia policy rate decision, Singapore purchasing managers index
• Thursday, May 4: China Caixin PMI manufacturing, Korea foreign reserves, Hong Kong S&P PMI manufacturing, Hong Kong retail sales
• Friday, May 5: China Caixin PMI composite, Indonesia GDP, Thailand foreign reserves, Philippines CPI, Taiwan CPI, Taiwan foreign reserves, Singapore retail sales

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