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2-Year Korean government bonds offer a ~90bps pickup over US Tsys from the perspective of an FX-hedged US investor and even higher for equivalent domestic bonds for Australian, UK and European investors, with similar spreads for other developed currencies. Korean cross currency basis swaps remain negative and have recovered less even as others have narrowed back to pre-pandemic levels. USD/KRW XCCY have stayed relatively wide thanks to a number of factors including structural supply-demand imbalances with Korean shipbuilders and Korean investors in foreign stocks selling FX forwards.
- The BoK has signalled that rate hikes will come later this year which has been factored into bond markets, short end bond remain a target for foreign investors (foreigners have bought around $30bn of Korean government bonds with maturities less than 3-years so far in 2021, around 75% of total inflow). GDP data today was slightly disappointing, but the lack of anything major to derail rate hike expectations has seen Korean risk assets strengthen and kept cross currency basis swaps around recent levels.
- Fig.1: KRW, AUD, EUR, GBP 3-Year XCCY