South Korean Pension Fund to Shun US Treasurys

South Korea's National Pension Service, the world's fifth-biggest pension fund, said on Thursday it was shying away from U.S. Treasurys because of falling yields and the weakening dollar.

The move by the NPS could signal a big shift by financial institutions away from U.S. government debt into higher-yielding assets, the Financial Times said.

The fund, which expects its assets to rise to 250 trillion won by the end of 2008, holds about 17.4 trillion won (US$17.63 billion) worth of foreign bonds of which U.S. Treasurys account for 94 percent. Those figures would suggest NPS holds about 16.4 trillion won in U.S. Treasurys.

"We sees the attractiveness of U.S. Treasurys falling," NPS spokeswoman, Chi Younghye, said. "The overall size of foreign bonds this year will be similar to last year's. There will be little net increase in our holding of foreign bonds for a while." She said if yields are more attractive later, the NPS would start buying again.

NPS plans to diversify into stocks and other higher-yielding assets in coming years to cope with a shortfall in funds due to the country's aging population.

By 2012 -- when NPS expects to be the world's second-largest pension fund -- foreign debt holdings will be less than 10 percent of its assets, while domestic bonds may account for less than half, compared with 74 percent at the end of 2007.

Bond Yields

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NPS holdings in U.S. Treasurys are a fraction of the $4,500 billion Treasury market, the FT noted.

"It is difficult to buy more U.S. Treasurys because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot," the newspaper quoted Kwag Dae-hwan, the head of global investments at the pension fund, as saying.

Yields on 2-year treasury notes have dropped sharply since the middle of last year as investors have bought the government debt as a safe-haven from the global credit crisis.

The 2-year note yielded more than 5 percent in June, but currently it returns around 1.68 percent. The 10-year Treasury yield has dropped to just under 3.5 percent from about 5.3 percent over the same period.