Bond margin trade surges to cover for losses from nosediving bond prices in Korea

The balance in margin account for bond trade has stretched to a historic high of 143.93 trillion won ($101 billion) on Tuesday, surging from 105 trillion won at the beginning of the year, as Korean brokerages rushed to hedge against losses from free fall in bond prices from soaring yields.

The balance added more than 1.5 trillion won this month alone as bond yields near record-high levels. Bond prices and yields move in the opposite direction.

As in stock, margin account is opened with brokerage houses to purchase bonds on bet for falling prices. The margin is the percentage of the bond value one has to keep in the account. Traders borrow bonds to buy relatively cheaper government bonds to cover up for the losses.

According to the Korea Exchange, institutions bought a net 2 trillion won worth three-year government bonds from July to September. Banks bought 1.11 trillion won and others 415.8 billion won. Hedging would have increased due to the fall in bond prices.

The favorite in the margin was the government bond maturing in 2051 with a coupon of 1.875 percent worth 12.7 trillion won, followed by 2042-maturing debt yielding 3 percent worth 7.98 trillion won worth.

The increase in bond margin suggests investors¡¯ bigger bet on a further fall in the government bond price. The three-year government bond yielded at 4.241 percent by midday Wednesday, compared with 1.855 percent at the beginning of the year, the five-year at 4.35 percent (compared with 2.08 percent), and 10-year at 4.35 percent (compared with 2.32 percent). The yields are bound to go higher as the base rate now at 3.0 percent is expected to go up at the next monetary policy meeting in November.

Losses have been snowballing due to devaluation in bond holdings.

Brokerages booked 1.4 trillion won loss in bond operation in the second quarter after 1.36 trillion won loss in the first quarter. In the fourth quarter of last year, they earned a profit of 563 billion won.

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