US Election Angst May Create Buying Opportunity for Korean Bonds

Heightened volatility stemming from the US elections later this year may provide a good opportunity to buy South Korea’s bonds, investors and analysts say.

Political uncertainty surrounding the November vote could push up Korean yields, making short-term securities attractive due to the potential for local interest-rate cuts, according to Mirae Asset Global Investments Co. Three-year yields may fall as much as 40 basis points by year-end, LS Securities Co. says.

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“There’s a risk for bond yields to climb, led by longer tenors, due to uncertainties around the US November elections,” said Choi Jinyoung, head of fixed-income management at Mirae Asset. Once those uncertainties ease, bonds maturing in less than three years are likely to rally into year-end due to potential Bank of Korea rate cuts, he said.

Mirae expects the three-year yield will drop as low as 2.9% toward year-end as the BOK trims its benchmark by as much as 75 basis points to 2.75% through its rate-cut cycle, Choi said. The yield fell to 3.05% this month, the lowest since August 2022.

Investors around the world are mapping out possible strategies to take advantage of the potential volatility caused by the US presidential vote, especially the increased likelihood of a second term for Donald Trump. The so-called Trump trade is seen boosting the dollar and weighing on higher-risk assets, including those in emerging markets.

Korean investors have an extra dimension to take into account as the central bank is expected to cut rates at least once by year-end. Traders are still pricing in a policy pivot even after BOK Governor Rhee Chang-yong sought to rein in those expectations when policymakers kept their key rate unchanged at 3.5% last week.

The central bank’s renewed concerns over financial imbalances may delay the date of the first cut to October from August, but “it’s just the timing that’s being pushed back,” said Woo Hye-young, a fixed-income analyst at LS Securities in Seoul. There’s still potential for two rate cuts this year, one each in October and November, she said.

Other local funds are more cautious.

KB Asset Management Co. is taking a wait-and-see approach as it watches the Korean yield curve to see how it reacts to expectations for rate cuts, said Kang Jin-won, director of the fixed-income division. There are a number of other possible market-moving factors to take into account such as the won, the level of household debt, and the potential inclusion of Korean bonds into FTSE Russell’s World Government Index, he said.

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