Korean Bond Yields Hit Record Lows on Rate-Cut Bets: Seoul Mover

South Korea’s government bond yields fell to record lows amid speculation the central bank will cut interest rates at a policy meeting next week.

The Bank of Korea will lower its benchmark rate by a quarter of a percentage point to 2.75 percent at an Oct. 11 review, according to eight out of nine economists surveyed by Bloomberg. Australia’s central bank cut borrowing costs two days ago to the lowest level since 2009, seeking to spur domestic demand as China’s economy slows. China is the No. 1 export destination for Australia and South Korea.

The yield on the 2.75 percent bonds due September 2017 fell two basis points, or 0.02 percentage point, to 2.80 percent at the close in Seoul, Korea Exchange Inc. prices show. That is the lowest level for a five-year note in Bloomberg data going back to 2000. The 3.25 percent notes due June 2015 fell two basis points to 2.74 percent, matching the Sept. 5 level for the benchmark three-year rate that was a record-low.

“Rate-cut bets in Korea are continuing after the Australian central bank’s action,” said Moon Hong Cheol, a Seoul-based fixed income analyst at Dongbu Securities Co. “Remarks made in the Bank of Korea’s September minutes aren’t enough to harm this sentiment.”

Some board members at the Bank of Korea stressed the need to preserve policy firepower at their September meeting and noted that a rate cut has limited effect, according to minutes released Oct. 2. The central bank left its seven-day repurchase rate at 3 percent last month, a decision forecast by only one of 16 economists surveyed by Bloomberg. The remainder predicted a 25 basis point reduction.

Interest-Rate Swaps

The one-year interest-rate swap slid two basis points from its Oct. 2 close to 2.80 percent. Local financial markets were closed yesterday for a holiday.

South Korea’s bonds will benefit from a possible decline in interest rates and capital inflows from sovereign-wealth funds, Ramin Toloui, global co-head of emerging markets portfolio management at Pacific Investment Management Co., manager of the world’s biggest bond fund, said in an interview in Singapore yesterday.

The won weakened 0.1 percent from Oct. 2 to 1,113.75, according to data compiled by Bloomberg. One-month implied volatility, a measure of exchange-rate swings used to price options, declined 12 basis points to 6.10 percent.

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