|Behind Korea's Bearish Call on Treasurys [seeking alpha]|
by: Elliot Eisenberg January 21, 2009
Much was said this week when a Korean pension official made a bearish call on US Treasury bonds.
The Wall Street Journal highlighted the comment on January 19 when it reported:
SEOUL -- An investment manager at South Korea's national pension fund said Monday it might sell U.S. Treasurys because of the prospect that they will become less profitable and stoke inflation.
There was undoubtedly some effect as the story moved along Dow Jones wires. It might even be the correct call by Korea's pension official. It is important to note, however, that this was not the first time Korean pension managers had spoken out against Treasurys.
In March, Korea's pension system announced it would no longer buy American Treasurys. The FT reported,
"It is difficult to buy more US Treasuries because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot," said Kwag Dae-hwan, head of global investments at the NPS. "We need to diversify our portfolio away from US Treasuries and we find asset-backed securities and corporate debt more attractive because of wider credit spreads."
While we are negative on the prospects for long-dated Treasury bonds, and long the TBT shares, it is important not to misunderstand Korea's mistake. To the extent that the $220 billion fund bought asset backed notes rather than dollar governments, it was horribly wrong.
To the extent that it was converting US dollars into local, Korean currencies, it was even more wrong. In March, 2008, it took an average 981.7 won to purchase a dollar. It now takes 1,445 won to do so. Historic exchange rate data is here.