South Korean pension fund shuns U.S. debt

By Song Jung-a, Andrew Wood, and Michael MacKenzie
Financial Times, London
Wednesday, March 26, 2008

http://www.ft.com/cms/s/0/6dcf5f86-fb67-11dc-8c3e-000077b07658.html

The world's fifth-largest pension fund will no longer buy US Treasuries because yields are too low. The move signals what could be a big shift by financial institutions away from US government debt into higher-yielding assets.

South Korea's National Pension Service, which has $220 billion in assets, said on Wednesday it wanted to broaden its range of overseas investments.

"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."

The yield on two-year US securities was 1.77 per cent in Asian trading on Wednesday, well below yields of 5 per cent in June. The rate recently fell below 1.5 per cent after several interest rate cuts by the US Federal Reserve.

Investors seeking safe haven assets have also driven Treasury yields sharply lower, with three-month Treasury bills recently near 0.5 per cent.

The NPS holds about $14 billion of US government debt, a small amount compared with the overall $4,500 billion Treasury market.

The pension fund has $24 billion in overseas assets with $7.2 billion in foreign equities. But it plans to diversify its portfolio and boost returns because it faces a shortfall in funds due to the country's ageing population.

A manager at the NPS's overseas investment team said: "The Fed continues to cut interest rates. We are still making profits from the Treasuries that we bought in the past but we think we'd better dispose of them and had better buy higher-yielding European-government debt."

Central banks from 16 Asian countries said last weekend at a meeting in Jakarta that they might invest more of their $1,000 billion of official reserves in one another's sovereign bonds instead of US Treasuries, given the dollar's volatility.

The Korean decision "is symptomatic of the times and the problems that the US is facing," said David Cohen, head of Asian economic forecasting at Action Economics in Singapore.

"This is the sort of pressure the US is facing after running this big current account deficit for years. Lots of people have said it's unsustainable."

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