Bloomberg News

Korea Bonds Decline as Central Bank Seen Holding Rate; Won Falls

July 10, 2012

South Korea’s government bonds fell for the first time in six days as economists forecast the central bank will leave borrowing costs unchanged this week even as a global economic recovery falters.

The Bank of Korea will keep its benchmark rate at 3.25 percent for a 13th month on July 12, according to 13 out of 15 economists surveyed by Bloomberg News. Two predict a 25 basis point cut. Finance Minister Bahk Jae Wan told reporters yesterday that the central bank will make a “wise rate decision,” mentioning that the International Monetary Fund has made recommendations on policy. The won declined on speculation South Korean importers are buying the dollar to settle bills.

“Bonds fell after the finance minister’s comments weakened sentiment expecting a rate cut and as data showed South Korean banks were selling bond futures,” said Kim Kyung Hun, a Seoul- based bond trader at Hana Bank.

The yield on the government’s 3.25 percent bonds due June 2015 rose one basis point, or 0.01 percentage point, to 3.22 percent at the close in Seoul, Korea Exchange Inc. prices show. The rate touched 3.21 percent yesterday, the lowest for a benchmark three-year note since December 2010. Ten-year yields advanced one basis point to 3.53 percent.

“Ten-year bond yields failing to fall below 3.50 percent also eased bullish bets,” Kim said.

Three-year debt futures dropped 0.06 to 104.95, after a six-day advance, and the one-year interest-rate swap fell one basis point to 3.26 percent.

‘Appropriate Response’

Maintaining South Korea’s policy rate at the current level is an appropriate response to global economic weakness and uncertainties, the IMF said in a statement on June 12. The monetary-policy stance is still accommodative, and when growth strengthens from its current moderation, some increase in the policy rate may be needed in early 2013, the fund added. Still, the BOK has room to cut rates if the economy weakens significantly, according to the statement.

The won declined 0.2 percent to 1,143.75 per dollar in Seoul, according to data compiled by Bloomberg. The currency’s one-month implied volatility, a measure of exchange-rate swings used to price options, slid 28 basis points to 7.40 percent. The Kospi Index (KOSPI) of shares fell for a third day, closing at the lowest level in almost two weeks.

“Investors are less sensitive about news from Europe now, and today’s currency movements were triggered by importers buying the dollar for deal settlement,” said Lee Yong Hee, a Seoul-based currency trader at Industrial Bank of Korea.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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