A fund manager is calling for investors to buy two-year South Korean government bonds while shorting the same country's ten-year bonds.
The trade is designed to profit from South Korea's yield curve steepening, says Ian Pizer, head of investment strategy at Aviva Investors' multi-strategy team.
"The Bank of Korea has cut interest rates to a historic low of 1.25%, and we think there is the potential for at least one more cut. That should help to pin down the front end of the yield curve," he said. "At the same time, the long end of the curve looks vulnerable to a global bond sell-off."
Pizer says he expects this trade to deliver a small return over the next few years, "if global monetary policy remains loose". There would be a larger return in the event of reflation.
"The main risk would appear to come from a reversal of the recent rise in global yields on weaker global growth prospects," he added. "That said, we would not expect the curve to become inverted, meaning any potential losses should be limited."
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