Investors should take positions in South Korea's swap market that profit from a "deep and prolonged recession," according to DBS Group Holdings Ltd, Bloomberg reported.
DBS recommends receiving the three-year rate, at 3.18 percent today in Seoul, and paying the one-year rate of 2.81 percent because the so-called swap curve is too steep given the outlook for monetary policy, Jens Lauschke, a fixed-income strategist in Singapore with DBS, Southeast Asia's biggest bank, wrote in a research note.
"Onshore swap rates are unlikely to fall much further at the very front-end of the yield curve," Lauschke said. "The three- year swap rate could easily fall if investors become more concerned about the likelihood of a deep and prolonged recession."
Goldman Sachs Group Inc., Nomura International Ltd. and UBS AG all forecast the Korean economy will contract this year, its first recession since the 1997-1998 Asian financial crisis. The Bank of Korea forecast last month that the economy will expand 2 percent this year, the slowest in 11 years.
The central bank will cut rates to 1.5 percent this year, Lauschke said. Policy makers last reduced the seven-day repurchase rate on Jan. 9 to a record low of 2.5 percent.
Korea's three-year swap rate rose this week from 2.94 percent, the lowest level in more than a decade, touched on Jan 9.
In an interest-rate swap, two parties agree to exchange payments over a period of time. Typically, one agrees to pay a fixed rate, while the other pays a rate that fluctuates with a benchmark index or formula defined in the contract. The swap curve charts the rate paid for different maturities.