Principal eyes South Korea bonds on global index inclusion, joining other large investors

By Jihoon Lee

SEOUL, April 1 (Reuters) - Last month's bond meltdown has opened a window for buying South Korean sovereign debt at a discount ahead of its inclusion in a global benchmark index, a large fund manager said on Wednesday, a day after Seoul said Japan's giant public pension fund was buying.

Benchmark 10-year yields KR10YT=RR rose more than 43 basis points last month, the sharpest rise since 2022, on investor concern that the Middle Eastern conflict is driving up inflation.

South Korean debt is set for inclusion in stages between April and November in the FTSE Russell World Government Bond Index (WGBI), tracked by some $2.5 trillion in capital globally.

"It is actually a pretty good opportunity," said Howe Chung Wan, head of Asia fixed income at U.S.-based Principal Asset Management, which manages roughly $594 billion.

"Given index inclusion ... you will have to come in for the index to meet your benchmark and the yields (now) are much higher," he said.

Principal estimates that around $60 billion in foreign investment will flow into South Korean bonds over the five months to August as index-tracking investors buy in.

Wan did not say whether Principal itself had added exposure. But there are signs cash is already moving.

An official at South Korea's finance ministry said on Tuesday that Japan's Government Pension Investment Fund, the world's biggest, has been buying treasury bonds and Reuters reported other Japanese funds have been buying.

The U.S.-Israeli war on Iran has sparked a surge in oil prices and inflation worries across financial markets, with South Korea's benchmark 10-year treasury bond yield also hitting its highest levels since November 2023 earlier this week.

($1 = 158.7700 yen)