SEOUL: South Korea's inflation-protected bond market seems to be undervalued due to a lack of liquidity and low trading volume, but will draw interest as a hedge against high inflation and an ageing population, HSBC officials said on Monday.
The inflation-linked treasury bond market in Asia's No.4 economy, with less than 10 billion won ($9 million) in daily trading volume, is set to become Asia's third-largest market after Japan and Australia. Thailand has mandated HSBC to start issuing inflation-linked debt.
Matthew Cannon, Head of Global Markets at HSBC in Seoul, told a briefing that the implied inflation rate of inflation-linked bonds in South Korea was about 2.7 to 2.8 percent, compared with HSBC's forecast of an average 3.4 percent beyond 2012.
"We suggest a regular buyback schedule for KTBi similar to off-the-run KTBs in the market, which makes dealers much more comfortable in making this market," he told reporters, in reference to inflation-protected Korean treasury bonds.
He also proposed incentives for primary dealers for market-making so as to improve its liquidity and efficiency.
HSBC is not among 20 primary dealers in South Korea.
"The combination of higher inflation and inadequate pension in an ageing population is a serious concern for the government in any economy," he told reporters.
"That's probably one reason why authorities here are trying to promote inflation-linked bonds."
The US inflation-linked treasury bond market for the benchmark 10-year notes had an outstanding value of $37 billion for the first six months of this year, about 46 times that of South Korea's, said Sung Hyun Yoo, head of HSBC's client rates trading in Seoul.
He reckoned that meaningful foreign flows might come to the market if daily trading volumes top 100 billion won.
"It's not about size of the market, but more of the liquidity of the market," Cannon added.
A Finance Ministry official overseeing the treasury issuance market told Reuters that the government has been studying measures to boost the inflation-linked bond market, without elaborating.
Copyright Reuters, 2011
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