Korean Bonds Complete Monthly Gain, Won Falls on Slowdown

South Korea’s five-year bonds finished a fifth monthly advance, the longest run of gains since 2004, and the won fell as signs Asia’s fourth-biggest economy is losing momentum spur speculation interest rates will be cut.

Factory output contracted 1.6 percent in July from a month earlier, following a 0.6 percent decline in June, a government report showed today. Exports probably shrank 6.8 percent in August from a year earlier, a separate survey showed before official data due tomorrow. Federal Reserve Chairman Ben S. Bernanke will speak today in Jackson Hole, Wyoming, where he may discuss the possibility of further monetary easing.

“Industrial output continuing to decline is seen as a sign of slowdown and history has shown that yields fall on expectations of inflows ahead of the Fed’s quantitative easing,” said Lee Seung Hoon, a Seoul-based fixed-income analyst at Samsung Futures Inc. “Overseas investors buying bond futures recently is also supporting the securities.”

The yield on the government’s 3.5 percent bonds due March 2017 fell 11 basis points this month, or 0.11 percentage points, to 2.86 percent in Seoul, Korea Exchange Inc. prices show. That matches a July 25 level, which was the lowest for a benchmark five-year note in Bloomberg data going back to August 2000. The rate slid one basis point today and eight basis points this week. So far this year, the yield has dropped 60 basis points.

Three-year debt futures climbed 0.33 to 106.30 for the month and the one-year interest-rate swap declined three basis points to 2.86 percent.

Interest Rates

Six out of seven board members at the Bank of Korea opted to cut the benchmark seven-day repurchase rate in July, minutes released this week showed, boosting speculation the central bank may act further to support growth. The bank refrained from lowering rates this month and the next policy meeting is due Sept. 13.

The won weakened 0.4 percent this month to 1,134.63 per dollar, according to data compiled by Bloomberg. The currency was little changed today and for the week. It appreciated 1.6 percent this year.

One-month implied volatility for the won, a measure of exchange-rate swings used to price options, jumped 14 basis points this month to 7.95 percent.

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