Fixed Income Strategy

Transcription

1 Market Update April Buyback and off-the-run spread tightening: normalization process Since tremendous quantities of KTBs mature in the year 14, the government has unusually included KTBs with 2~3.5y to maturities in its April bond buyback plan. This in turn has narrowed spread between on-the-run and off-the-run bonds. Dongjun Shin Chief Strategist (+822) The buyback plan and the subsequent tightening of off-the-run KTB spread are a part of natural process of economic environment and financial market returning to precrisis norm. Since 9, KTB issuance had surged by over 5% compared to 8 volume. Accordingly, volume of buyback would also increase in the same proportion as the buyback is targeted for off-the-run KTBs maturing in 14 or later. Domestic growth beating the government forecast also makes it more likely to see KTB issuance reduction or buyback over time nearing year end. The off-the-run spread that had widened would also experience normalization. More specifically, the spread between 5y off-the-run KTB (with 3y to mat) and 3y on-the-run KTB currently at around 16bp, will likely tighten to pre-crisis level at 5~bp. April buyback plan includes KTB (9-1) and (4-6) and these KTBs would need additional buyback and/or exchange over KRW trillion till they mature, so buyback benefits should remain valid for a while. Potential KTBs to be included in subsequent buyback plans are for short-term, and for mid-term KTBs in order would likely be the biggest beneficiary in long-term. Spread between 3y off-the-run (initially 5y, currently 3y to mat) and on-the-run KTBs 8 (bp) Spread between 3y on-therun and 5y off-the-run KTB (with 3y to mat.) Spread between 5y and y off-the-run KTBs (both with 3y to mat) Apr-11 Apr Apr-13 Hongcheol Moon Analyst (+822) m5@dongbuhappy.com Yuna Park Analyst (+822) yuna.park@dongbuhappy.com Sangwon Noh Analyst (+822) swnoh@dongbuhappy.com Hyojin Kim Economist (+822) hjkim1984@dongbuhappy.com Kyoungrok Lee Credit Analyst (+822) newgift7@dongbuhappy.com KTB maturities volume Euntaek Lee China Analyst 4-6 (+822) go4it.lee@dongbuhappy.com Apr-14 Kwangsook Hwang CFA, Senior Credit Analyst (+822) kshwang@dongbuhappy.com Apr Apr-16 Apr-17 Apr

2 Buyback forces off-the-run spread to return to pre-crisis norm Reason the government extends buyback to KTBs with longer term to maturity Unlike in the past when only short-term bonds used to selected for buyback, the government has unusually included mid-term bonds with 2~3.5y term to maturity in its April KTBs buyback plan; (8-1), (8-4), (9-1), 5-19 (9-3) and (4-6). This in turn tightened the spread between offthe-run KTBs with 3y to mat. (5y or y KTBs with 3y to mat.) and 3y on-the-run KTBs by 7~9bp (the off-the-runs strengthened). Amid the global financial crisis aftermath in 9, KTB issuance had surged by over 5% compared to the volume in 8 and enormous quantities of KTBs start maturing from 14. When KTB maturities concentrate in a particular short interval, massive liquidity gets released in the market, thereby risking market volatility to a sudden jolt. In order to prevent this, the government in advance buys back some of those KTBs that simultaneously mature in a specific period, the year 14 in our case, and reduces the volume of KTBs with concentrated maturities. However, because the volume has also expanded over 5%, buying back only the short-term KTBs isn t sufficient for the government to reduce the concentrated maturities. This is the reason the government extended its buyback plan to intermediate-term KTBs with 2~3.5y to maturity this time. Fig 1. KTBs with 2~3y to maturity included in the government s April buyback 1Y or less 1~2Y 3.5 2~3Y 3~5Y April buyback expected 3. 5~Y Jun-8 Dec-8 Jun-9 Dec-9 Jun- Dec- Source: Ministry of Strategy and Finance (MoSF) and Dongbu Securities Fig 2. 9 KTB issuance soared over 5% compared to 8 volume 9 3Y 5Y Y Y (E) Source: MoSF and Dongbu Securities 2

3 Buyback and off-the-run spread tightening are part of normalization process In the past, 7~ 8, the spread between 3y off-the-run and on-the-run KTBs (offthe-run spread) had been around 5~bp. In the wake of the global financial crisis, flight to on-the-run sharply widened the off-the-run spread. From 9, the spread tightened as rise in the KTB yields induced concentrated sell-off of on-the-runs with good liquidity. Since then, the spread has been moving in ~bp rangebound except in end- when there was a squeeze in the 3y on-the-run (-1312). The government s inclusion of KTBs with 2~3.5y to mat. inclined the off-the-run spread (between and -1312) to narrow to 16bp. Though the tightening pace is quite rapid, we believe this is part of the natural process of economic environment and financial market returning to pre-crisis norm. We anticipate the spread narrowing to continue to 5~bp, pre-crisis level in 7~ 8. There are two reasons for our belief and they are the following. (1) The government in its 11 budget originally estimated the GDP growth to be 3.9%, but the BoK and major Korean economic institutions are presently considering to raise their forecasts to mid-4%. Increase in tax revenue following the economic growth usually expands the allotment base for buyback set aside by the government. In fact, Korean government announced that it would plan to allocate KRW 2 trillion out of 6 trillion tax surplus from last year to base funds for buyback in 11 (buyback ceiling for 11 is KRW 12 trillion). In short, the domestic growth beating the government forecast increases the possibility of buyback and/or KTB issuance reduction over time nearing year end. (2) Considering the past buyback practices, the buyback plan would likely persist till outstanding amount of each KTB reduces to about KRW 7 trillion. The amount of KTBs maturing in 14 currently stands at KRW 6 trillion. On top of this, we have to add KRW 9.6 trillion worth 3y KTB to be issued in upcoming June, which would also mature in the same year, 14. This totals to about KRW 7 trillion worth KTBs maturing in 14. Taking into account the volume of KTBs that have been adjusted through buyback plans comes to around KRW trillion per year and that the trend continues even after 15, buyback is inevitable for the government to spread out those concentrated maturities. 3

4 Fig 3. Spread between 3y off-the-run (initially 5y, currently 3y to mat) and on-the-run KTBs Fig 4. KTB maturities volume (bp) Spread between 3y on-therun and 5y off-the-run KTB (with 3y to mat.) Spread between 5y and y off-the-run KTBs (both with 3y to mat) Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Source: Bond pricing agencies average and Dongbu Securities Source: Korea Financial Investment Association (KOFIA) and Dongbu Securities List of attractive KTBs in light of buyback and exchange Spread between 3y on-the-run and 5y off-the-run KTB to further tighten There are two off-the-run KTBs with 3y to mat; 5y KTB (9-1) and y KTB (4-3). The spread between the two is currently 6bp. The spread between 5y KTB (9-1) and 3y on-the-run KTB (-6) is 16bp. Given average levels of the spreads in 7~ 8, they may further tighten by about 5bp and 5~bp, respectively. With buyback and exchange in consideration, buyback benefits for (9-1) and (4-6) to remain valid For KTB (Outstanding Amount: KRW 17.7 trillion) and (O/A: KRW.3 trillion) already included in the buyback plan, there will be over KRW trillion worth buyback before they mature. Furthermore, the two KTBs are included in the government s exchange plan (to 3y and 5y on-the-runs) as well. Prospective KTBs to be selected in buyback are (7-5), (-1), and (5-4) in order In the past, the government has usually been buying back or exchanging KTBs till outstanding amount in each KTB reduces to around KRW 7 trillion. Among shortterm KTBs with 6m~1y to maturity, (7-5, O/A: KRW 15.5 trillion) may be included to buyback. For intermediate-term debts with 2~3.5y to mat, (-1, O/A: KRW 15.5 trillion) and (5-4, O/A: KRW 17.9 trillion) will 4

5 likely be selected for the buyback plan. KTB (5-4) is actually included in exchange plan as well. Buyback feasibility for KTBs with 5y to mat: (8-5) to be long-term beneficiary KTB (8-5, O/A: KRW 28.6 trillion) has by far the largest outstanding issue amount. This may retract timing of buyback inclusion sooner, unlike other KTBs. Buyback discussion may arise when its term to mat nears about 5.5y. This particular debt is likely to be the biggest beneficiary KTB in terms of buyback and exchange plans. Fig 5. Liquidity of KTB s (To Be) included in buyback 32 Circulable Amount est. Non-circulable Amount Fig 6. Trading trend of buyback KTBs since the plan announcement (KRW mln) 4, Net purchse of buyback KTBs (Apr1~4) 3, Foreigner Bank 2, Pension Insurance Asset Mng. Securities (est.) 1, -1, -2, -3, Already included in buyback Prospective KTBs for buyback -4, Source: KOFIA and Dongbu Securities Note: Non-circulable Amount includes foreigners, banks, pension funds, insurance firms, government, and other government owned institutions. Source: KOFIA and Dongbu Securities 5

6 Fig 7. List of KTBs and relevant information Name Issue Date Maturity Exchange plan incl. Prospective Term to Issue Amt Expected Yield Buyback incl. KTBs to Mat(y) 3y 5y timing of incl. Buyback plan KTB (1-5) KTB 55-16(8-3) KTB (1-8) KTB (6-4) KTB (1-11) KTB (8-6) KTB (2-3) KTB (7-1) KTB (2-6) KTB -16(9-2) KTB (2-9) KTB (7-5) After 3 m KTB (2-12) KTB (9-4) KTB (8-1) KTB 5-13(3-4) KTB (-2) KTB (8-4) KTB (3-7) KTB (-1312(-6) KTB (9-1) KTB (4-3) KTB 5-19(9-3) KTB (4-6) KTB (-1) After 6 m KTB -159(-5) KTB (5-4) After 1 y KTB -163(11-1) KTB 5-169(6-5) KTBi (7-2) KTB (7-6) KTB (8-5) After 2 y KTBi 275-6(-4) KTB 5-6(-3) Source: Dongbu Securities Note: Shaded KTBs stand for most attractive ones. 6

7 FIXED INCOME BUSINESS TEAM CONTACTS RESEARCH Dongjun Shin Chief Strategist (+822) Kwangsook Hwang (CFA) Senior Credit Analyst (+822) Kyoungrok Lee (KICPA) Credit Analyst (+822) Eunjin Ko (CFA) Quant Analyst (+822) Hongcheol Moon Analyst (+822) Yuna Park Analyst (+822) Hwatak Chang Chief Economist (+822) Hyojin Kim Economist (+822) Sangwon, Noh Research Assistant (+822) Sam Moon Translator/RA (+822) SALES Jongug Cho Head of Global F.I. Sales (+822) Sanghee Han Michelle Sim (+822) (+822) This report is a translation excerpt of the Korean version publicly released on April 6,. has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. This report accurately reflects the personal views of the analyst(s) and was written without any undue external influence or intervention. No part of any of the analyst(s) compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research. Disclosures This memorandum is based upon information available to the public. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Dongbu Securities Co., Ltd. ("DONGBU") makes no representation that it is accurate or complete. All opinions and estimates contained in this report constitute DONGBU s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Neither DONGBU nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. All materials in this report are the intellectual property of DONGBU. This report or any portion hereof may not be reproduced, distributed or published without the prior written consent of DONGBU. 7