Korean Bonds Rise as Exports Plunge, Inflation Cools; Won Gains

South Korea’s bonds rose, building on a run of four monthly gains, as data showing a slide in exports and the slowest inflation since 2000 fanned speculation the central bank will cut interest rates. The won climbed to a four- month high before a Federal Reserve meeting ends today.

Overseas sales fell 8.8 percent in July from a year earlier, the biggest contraction since September 2009, the government reported today. The median estimate in a Bloomberg News survey was for a 3.7 percent decline. Consumer prices rose 1.5 percent, less than all 16 estimates in a Bloomberg survey. The Kospi Index (KOSPI) snapped a four-day rally even as overseas funds bought more Korean equities than they sold for a fourth day.

“With consumer-price gains falling toward the 1 percent level and exports posting the biggest decline this year, there are expectations that the Bank of Korea will cut rates further,” said Travis Choi, a fixed-income analyst at Woori Investment & Securities Co. in Seoul. The Bank of Korea unexpectedly lowered its benchmark rate by a quarter of a percentage point to 3 percent last month.

The yield on South Korea’s 3.25 percent notes due June 2015 slipped two basis points, or 0.02 percentage point, to 2.83 percent at the close in Seoul, Korea Exchange Inc. prices show. That follows a 45 basis point drop in July that was the biggest decline for a benchmark three-year note since 2008. Three-year debt futures rose 0.03 to 106.00 and the one-year interest-rate swap fell three basis points to 2.85 percent.

The won rose 0.4 percent to 1,126.60 per dollar, according to data compiled by Bloomberg. The currency touched 1,125.20 earlier, the strongest level since April 3. One-month implied volatility, a measure of exchange-rate swings used to price options, dropped four basis points to 7.77 percent.

“Exporters sold dollars today to repatriate overseas earnings carried over from last month, and we saw foreign investors selling the greenback ahead of Fed meeting results,” said Choi Sung Hyun, a Seoul-based currency trader at Woori Bank.

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

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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