South Korean Bonds Gain as Central Bank Holds Rate; Won Drops

South Korea’s three-year government bonds rose, driving the yield to an eight-month low, after the central bank kept interest rates unchanged at a record low to support a pickup in the economy. The won weakened.

The notes gained for a third day after the Bank of Korea said in a statement after today’s decision that it “will maintain the accommodative policy stance for the time being in such a way as to help sustain the trend of recovery in economic activity.” The government pressed Governor Lee Seong Tae Lee, whose term expires March 31, to hold down rates as unemployment soared and sovereign-debt concerns in Europe weighed on markets.

“The tilt has clearly shifted back to global growth concerns, with the statement hinting that inflation pressures will remain stable for some time,” said Wai Ho Leong, an economist at Barclays Plc in Singapore. “Demand for bonds from money managers will likely continue biasing yields lower.”

The yield on the 4.25 percent note due December 2012 fell 10 basis points, or 0.10 percentage point, to 3.98 percent as of 3:12 p.m. in Seoul, according to Korea Stock Exchange. That was the lowest level since July 14.

The five-year bond yield declined 12 basis points to 4.46 percent, the least in four months.

Finance Minister Yoon Jeung Hyun told reporters on March 8 that “it is the government’s firm belief that it is not the right time for rate hikes” as business investment is weak and prices are at manageable levels.

Won Weakens

The central bank kept the seven-day repurchase rate at 2 percent, a decision forecast by all but one of 14 economists surveyed by Bloomberg News. Since January, Governor Lee has had to accept a vice finance minister sitting in on rate meetings.

The won retreated from a seven-week high on speculation Korea Electric Power Corp. (015760), the nation’s biggest power company, bought dollars to hedge against its foreign-exchange position, said Tae-Shin Park, a bond and currency trader at Societe Generale SA in Seoul.

“There was some news that Kepco will need to buy $500 million, that pushed up the dollar-won from the low,” said Park. “The rate decision also played a part.”

The won weakened 0.2 percent to 1,133.43 per dollar as of the 3 p.m. close, according to data compiled by Bloomberg. It earlier appreciated as much as 0.4 percent to 1,126.23, the strongest level since Jan. 19.

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

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

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