Credit-default swaps referenced to sovereign Korea saw strong interest last week on the back of overseas funds grabbing protection. Some USD300 million traded in the last week versus USD75-100 million in a typical week. Traders said fund managers were primarily buying five-year protection on the sovereign to hedge macro-country risk while simultaneously returning to the domestic equity market to pick up stocks. Protection buyers were also looking to take positions in anticipation of an uptick in volatility ahead of events likely to impact regional markets, such as the presidential election in the Philippines in May and the U.S. election, according to a trader at Deutsche Bank.
Despite the pickup in protection buying, credit spreads on the sovereign remained steady. "A lot of this is getting absorbed by the [market]," said one credit trader at a bulge bracket house, noting that investment banks have been selling protection on Korea to package the name into structured credit deals, such as global synthetic collateralized debt obligation portfolios. The five-year default swap bid/offer spread on Korea stood at 50/53 last Thursday from 53-56bps last Monday, on the back of increased trading.
One dealer said the move in spreads was subdued, in contrast to moves of 7bps per day a few weeks back when word of the push to impeach Korean president Roh Moo Hyun first hit the market. Korea is rated A3 by Moody's Investors Service, with a negative outlook, and single A negative with a stable outlook by Standard & Poor's.
