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Korea Three-Year Bonds Rise, Won Falls as Growth Forecast Cut

March 28 (Bloomberg) -- South Korea’s three-year bonds rose, sending the yield to a record low, and the won weakened after the government cut this year’s economic growth forecast and said it will provide a stimulus package.

The yield on the 2.75 percent notes due December 2015 dropped 11 basis points, or 0.11 percentage point, to 2.47 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 finance ministry said the economy will expand 2.3 percent in 2013, down from a December forecast of 3 percent and lower than the central bank’s projection of 2.8 percent.

“The cut in growth projection boosted expectations the Bank of Korea will need to cut rates as soon as April,” said Yoon Yeo Sam, an 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 since a 25 basis-point cut in October. Finance Minister Hyun Oh Seok said March 22 he would use “all possible measures to speed the economic recovery.”

South Korea’s gross domestic product increased 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. The ministry said today it will unveil a new stimulus package in April to revive the economy.

Current Account

The won earlier 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 currency dropped 0.1 percent to 1,113.15 per dollar at the close 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 nine basis points to 7.66 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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