Korean insurers are increasingly looking at long-dated bonds at home as rising hedging costs hurt their appetite for foreign assets, putting downward pressure on lengthier won debt yields, reports Bloomberg.
Driving the demand for long-term securities are stricter insurance capital rules that require insurers to extend the maturity of assets. Foreign securities have become less attractive as a way to lengthen the maturity of their holdings, as the cost to hedge dollar-denominated investments back into won surged to near nine-year highs.
“Rising hedging costs are a real worry for insurers,” said Moon Hong-cheol, a fixed-income strategist at DB Financial Investment in Seoul. “It’s become really difficult to invest in US dollar bonds, and insurers are forced to buy more won debt with super-long maturities as a result.”
Insurer demand for longer local debt is encouraging borrowers to issue lengthier notes.
LG Electronics is planning to sell bonds including 15-year notes next month, a person familiar with the matter said, after selling 20-year securities at 4.195% via private placement last month, its longest-ever debt.
“The high hedging costs will likely continue, considering that there isn’t a strong motivation for a rate hike in Korea while the US is on track to raise rates,” said Lee Kyoung-rok, credit analyst at Mirae Asset Daewoo in Seoul.