Emerging Asia's favoured South Korean bonds performed the worst in October

Seoul

INVESTORS may have flocked to South Korean bonds this year, but signs of an economic recovery and the potential for record debt sales saw them end last month as Asia's worst performer.

Korean government bonds lost 2.1 per cent in October, the worst-monthly performance since November 2016, according to a Bloomberg Barclays index. It was the third-biggest drop among 46 sovereign markets tracked by Bloomberg, and the biggest in Asia.

"Easing external uncertainties since the end of August along with lower expectations for central banks to ease further has suddenly weakened the demand for Korean bonds," said Koo Hyeyoung, fixed-income analyst at Mirae Asset Daewoo Co. The amount of debt that is expected to be issued by the government next year to help cover the deficit has also contributed to the sell-off, she said.

Foreign investors have poured over US$41 billion into Korean bonds this year, the most in emerging Asia after China, as the Sino-American trade war and a tech slowdown spurred the Bank of Korea to lower rates. The tide may be turning with Samsung Electronics Co, a pillar of the economy, reporting better-than-expected earnings last week.

Consumer prices also showed signs of recovery in October, staying flat after a 0.4 per cent slide in September. On the supply side, investors are concerned about plans for a debt-fuelled stimulus.

The finance ministry said in August that it will sell as much as 130.6 trillion won (S$152.7 billion) of bonds in 2020 based on its budget proposal. That compares with a planned 99.6 trillion won of issuance this year, and would be the largest quota in history if passed by parliament.

The yield of 10-year Korean debt has risen to 1.73 per cent as at Friday, more than 50 basis points from its August low. The extra yield investors demand to hold 10-year notes over three-year securities has climbed more than 20 basis points since the budget proposal, to the highest in almost a year.

The move also paces a broader global bond sell-off as signs of progress in US-China trade talks dampen demand for haven assets.

Korea's benchmark 10-year yield could break higher into a range between 2.5 per cent and 3 per cent should Washington and Beijing agree on additional trade deals, according to DBS Bank Ltd. Till then, the yields could be capped at 2 per cent as investors remain cautious about an economic rebound, said Duncan Tan, FX and interest rates strategist at the Singapore-based bank.

"Korean yields were always more likely to see a bigger bounce compared to rest of Asia," said Mr Tan. "This is just the start." BLOOMBERG