Behind Korea's Bearish Call on Treasurys

Much was said this week when a Korean pension official made a bearish call on US Treasury bonds.

The Wall Street Journal highlighted the comment on January 19 when it reported:

SEOUL -- An investment manager at South Korea's national pension fund said Monday it might sell U.S. Treasurys because of the prospect that they will become less profitable and stoke inflation.

There was undoubtedly some effect as the story moved along Dow Jones wires. It might even be the correct call by Korea's pension official. It is important to note, however, that this was not the first time Korean pension managers had spoken out against Treasurys.

In March, Korea's pension system announced it would no longer buy American Treasurys. The FT reported,

"It is difficult to buy more US Treasuries because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot," said Kwag Dae-hwan, head of global investments at the NPS. "We need to diversify our portfolio away from US Treasuries and we find asset-backed securities and corporate debt more attractive because of wider credit spreads."

While we are negative on the prospects for long-dated Treasury bonds, and long the TBT shares, it is important not to misunderstand Korea's mistake. To the extent that the $220 billion fund bought asset backed notes rather than dollar governments, it was horribly wrong.

To the extent that it was converting US dollars into local, Korean currencies, it was even more wrong. In March, 2008, it took an average 981.7 won to purchase a dollar. It now takes 1,445 won to do so. Historic exchange rate data is here.

Disclosure: Author owns TBT shares

Comments

[Harry kim:]

you mean TB is weak, but Korean currency is much weaker than TB.
So, even though TB is not so good, NPS should keep holding TB.
right??

but why don't you suggest more sexy item than TB??

Jan 21 06:52 PM

[Elliot Eise...:]

You can sell the 30 year T bond short. It is easy to do with very low margin requirements. You can follow the bond here www.bloomberg.com/mark...


On Jan 21 06:52 PM Harry kim wrote:

> you mean TB is weak, but Korean currency is much weaker than TB.
>
> So, even though TB is not so good, NPS should keep holding TB. <br/>right??
>
>
> but why don't you suggest more sexy item than TB??

Jan 22 06:43 PM

[Elliot Eise...:]

Reiterating, what I mean is that Korean Pension has been bearish on US bonds during a great bull market. They are probably correct now but have not been from March till recently.

Jan 22 06:45 PM