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Korean Bonds Advance as BOK Says Policy to Focus on Growth

Dec. 27 (Bloomberg) -- South Korea’s government bonds rose on speculation the central bank will lower interest rates to support growth in Asia’s fourth-biggest economy. The won climbed to a one-week high.

Bank of Korea released a monetary policy report for 2013 today that predicted a mild recovery for the economy said it will closely monitor external risk factors. It kept the seven-day repurchase rate unchanged at 2.75 percent this month, after lowering it twice in 2012. South Korea’s finance ministry today cut its 2013 growth forecast to 3 percent, from a September projection of 4 percent, and lowered its estimate for expansion this year to 2.1 percent from 3.3 percent.

“Comments made in the central bank statement that it will focus on supporting the economic recovery were interpreted as dovish by market participants,” said Huh Kwan, a Seoul-based fixed-income trader at Korea Investment & Securities Co. The prospect of interest-rate cuts typically bolsters demand for fixed-income securities.

The yield on South Korea’s 2.75 percent bonds due September 2017 declined two basis points, or 0.02 percentage point, to 3.03 percent at the close in Seoul, Korea Exchange Inc. prices show. Benchmark five-year notes yielded 3.46 percent at the start of this year. The one-year interest-rate swap fell one basis point today to 2.81 percent.

The won appreciated 0.1 percent to close at 1,072.16 per dollar in Seoul, according to data compiled by Bloomberg. It earlier fell as much as 0.1 percent before recouping the loss amid speculation some exporters were repatriating income before year-end. This year’s 7.5 percent advance is the biggest among Asia’s 11 most-traded currencies.

A government report tomorrow may show South Korea’s factory output expanded 0.8 percent in November from the previous month, the biggest gain since May. Manufacturers’ confidence rebounded from a three-year low, according to Bank of Korea data released today.

One-month implied volatility, a measure of expected moves in exchange rates used to price options, fell 20 basis points today to 4.75 percent. It was 13.55 percent at the end of 2011.

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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