By Kim Jae-won
Staff Reporter
The premium on Korean bonds, which is a barometer measuring the nation's default risk, has fallen to its lowest level in 19 months, on the back of strengthened fundamentals led by a fast economic recovery.
The Korea Center for International Finance (KCIF) said Tuesday that the credit default swap (CDS) premium on the government's five-year foreign exchange stabilization bond was traded at 76 basis points above the coupon rate Monday, the lowest since June 2008.
This means that anyone holding $10,000 in Korean government bonds would have to pay $76 to insure against Seoul being unable to repay over the next five years.
The level is even lower than that of the United Kingdom by 3 basis points, suggesting that Korean bonds are regarded as safer than those issued by London among global investors.
A CDS is a vehicle for trading credit risk. The buyer of a CDS deal pays a spread to its seller in exchange for getting a par value on any specified bonds or other instruments when they default. The nation's CDS premium once rose to as high as 699 points following the Lehman Brothers bankruptcy.
The KCIF said that the drastic lowering of the CDS premium means that foreign investors look positively on the Korean economy.
"Many foreign investors think the Korean economy will show a robust performance this year. Most of them forecast over 5 percent growth on average. The lowered CDS premium reflects such a positive forecast," it said.
Analysts said that this was due to a recovering global economy and will be good for the nation to attract finance.
"Not only Korea, but other countries have also seen their CDS premiums go down as the global economy recovers. It will help the nation to reduce borrowing costs on overseas markets," Kyobo Securities analyst Joo Sang-chul said.
Meanwhile, CDS premiums for China and Chile stood at 61 basis points, while those for Malaysia and Thailand were 82 and 94 basis points, respectively.