Korea Three-Year Bond Yield Declines to Record on Rate-Cut Bets

South Korea’s three-year bond yield fell the most since July to a record low on speculation the central bank will cut interest rates as early as next month to support a slowing economy.

The yield on the 2.75 percent notes due December 2015 dropped nine basis points, or 0.09 percentage point, to 2.49 percent, according to prices from Korea Exchange Inc. That’s the lowest for a benchmark three-year note in data compiled by Bloomberg going back to 2000. The government will cut its 2013 economic-growth forecast to “mid-2 percent” from 3 percent, the Maeil Business Newspaper reported today. The Finance Ministry is scheduled to release details of this year’s economic policy at 2 p.m. today.

“Reports that the government may cut its growth projection boosted expectations the Bank of Korea will need to cut interest rates as soon as in April,” said Yoon Yeo Sam, analyst at Daewoo Securities Co. in Seoul. “Even if it’s not in April, investors are betting the BOK will reduce interest rates at some point to help the economy.”

Bank of Korea Governor Kim Choong Soo has held the seven- day repurchase rate at 2.75 percent after a 25 basis-point cut in October. Finance Minister Hyun Oh Seok said March 22 that he would use “all possible measures to speed the economic recovery.”

South Korea’s gross domestic product expanded last quarter at the slowest pace since the global recession. GDP rose 1.5 percent from a year ago, the smallest gain since 2009, the central bank said March 26.

Current Account

The won rose as much as 0.3 percent after official data showed the nation’s current-account surplus widened in February. The measure increased to $2.71 billion from $2.33 billion in January, the Bank of Korea said today. The gap for March is likely to be similar as improving exports will offset an expected rise in dividend payments to foreign investors, according to Cho Yong Seung, a central bank official.

The currency was 0.2 percent weaker at 1,113.90 per dollar as of 12:36 p.m. in Seoul, according to data compiled by Bloomberg. It dropped 0.6 percent yesterday, the most since March 14, as overseas investors pulled money from South Korea’s stocks amid worsening tensions with North Korea. Demand for emerging-market assets also cooled in the past two weeks as Cyprus became the fifth euro-area member to seek a bailout.

North Korea yesterday cut a military hotline with the South, a day after putting its artillery forces on high alert and threatening to attack the U.S.

One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, dropped 13 basis points to 7.61 percent, according to data compiled by Bloomberg. Global funds have sold $1.9 billion more Korean stocks than they bought this month, exchange data show.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

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

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