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Fixed Income Weekly-Investors need time to adapt themselves to the lowered yield level

May 26, 2014 14:02|May 26, 2014 14:03
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Given attractive supply-demand conditions and the tepid economic recovery (slower than expected), the yield downtrend should continue after the short breath taking. As such, we advise: 1) buying long-term bonds on each and every yield hike; and 2) delaying the carrying out of risk management.

Ÿ Last week’s bond market
– Last week bond yield showed range-bound movement as the inflow of carry demand offsets the price burden. In detail, the 5yr KTB yield climbed 0.2bp w-w to 3.068%, and the 3yr corporate bond (AA-) yield decreased 1.2bp w-w to 3.166%. The yield curve also remained almost flat.

Ÿ Bond market outlook
– Issue: Bond yield broke the bottom of the trading range in May, but last week showed range-bound movement.
Regarding the global and domestic economic condition friendly circumstances for bond investment has unchanged. Moreover, favorable supply/demand condition and growing concerns over sluggish domestic consumption is increasing the downward pressure on bond yields. Some investors are expecting the release of economic stimulus measure in June (as the government will announce the further direction of economic policy at the end of June) which will weaken the hawkish stance of BoK. However, in the short-term bond market will take a breather as technical and price burden has increased. Additionally, recent increase of US treasury yields due to the economic data recovery will also work as an upward pressure in domestic bond yields.

– Outlook: This week, we forecast that bond yields will remain ragebound, with the 3yr KTB yield likely ranging between 2.81~2.86%, the 5yr KTB yield ranging between 3.05~3.10%, and the 10yr KTB yield ranging between 3.36~3.41%. Favorable condition for bond market will continue, however, the investors need time to adapt themselves to the new yield level. Bond market rally is still continuing, and yields will re-start trending upwards as early as end-3Q14 on the probable fading of concerns towards the global recovery.
*Source: Woori Investment & Securities Co.