Korea targets wider Asia bond sales to cut crisis risk

Korea is seeking to sell bonds to a broader range of investors, especially within Asia, to limit the risk of large, swift investment outflows triggering a crisis, a finance ministry official said.

“We would like to broaden our bond buyers overseas so that we can avoid a financial crisis caused by the sudden flight by a few,” Woo Hae-young, director of the Government Bond Policy Division at the Ministry of Strategy and Finance, said an interview. “We’re looking to Asia, especially China, Hong Kong, Singapore, Malaysia, and Thailand, for long-term investors.”

Two nations, the U.S. and Thailand, together hold more than 40 percent of foreign-owned Korean bonds, according to end-2010 data from the Financial Supervisory Service. Overseas investors sold Korean assets in 2008, triggering a plunge in the won and pummeling bond prices, after the collapse of Lehman Brothers Holdings Inc. intensified the global financial crisis.

Woo also said that the government plans to issue more inflation-linked bonds and may begin to buy back treasuries in April or May. The government buys back bonds ahead of maturity, replacing old issues with new ones in an effort to improve market liquidity.

Korea’s local-currency bonds have declined 0.3 percent this year, the third worst in the region after the Philippines and Indonesia, among Asia’s 10 most active markets, according to indexes compiled by HSBC Holdings Plc. In the past 12 months, the bonds have gained 5.6 percent.

The yield on the benchmark three-year note was 3.94 percent as of 11:29 a.m. in Seoul, up from 3.38 percent at the end of last year. The rate was at 4.08 percent a year ago.

The won slid 0.2 percent to 1,117.04 per dollar, paring its gain to 1.4 percent for the past 12 months.

The U.S. held 20.5 percent of foreign-owned Korean bonds as of end-2010, followed by Thailand at 20 percent and Luxembourg at 15.7 percent. Others included: China at 8.9 percent, the U.K. with 6.1 percent, Malaysia at 5.8 percent, France with 5.3 percent, Switzerland at 3 percent, Hong Kong at 2.8 percent, and Singapore with 2.5 percent.

Officials will encourage purchases by a more diverse range of buyers by meeting with investors, Woo said. Foreigners own 6.6 percent of local bonds.

In January, the government revived a tax of as much as 14 percent on interest income from treasury and central-bank bonds held by foreigners, as well as a 20 percent levy on capital gains from their sale. 

(Bloomberg)