Korean Five-Year Yield Drops to Record on Rate-Cut Speculation

South Korea’s bonds rose, pushing the five-year yield to a record low, as slowing inflation and the minutes of last month’s central bank policy-setting meeting spurred speculation borrowing costs will be lowered.

The yield on the 2.75 percent government notes due March 2018 fell six basis points to 2.5 percent from April 30, according to prices from Korea Exchange Inc. That’s the lowest for a benchmark five-year security in data compiled by Bloomberg going back to August 2000. Financial markets were closed for a holiday yesterday. The yield has fallen 18 basis points in the last five trading days.

Consumer prices rose 1.2 percent in April from a year earlier, less than 1.3 percent in March and the 1.5 percent increase forecast in a Bloomberg survey, official data showed yesterday. Three of the seven central bank board members called for a rate cut last month, minutes of the policy meeting released on April 30 showed. The next review is on May 9.

“Ahead of the Band of Korea interest-rate decision next week, the expectation on the rate cut has peaked today after the release of the BOK minutes,” said Lee Jae Seung, a fixed-income strategist at KB Investment & Securities Co. in Seoul. “Inflation is stable, which won’t be a major factor in the BOK decision next week.”

The Bank of Korea has held the benchmark seven-day repurchase rate at 2.75 percent since October, resisting pressure from the government for a reduction even as a sliding yen hurt the nation’s exporters. All five analysts surveyed by Bloomberg forecast the rate will be left unchanged next week.

Financial Support

Exports from Asia’s fourth-largest economy rose 0.4 percent from a year earlier in April, exceeding imports for a 15th straight month, the government reported yesterday. South Korea’s Purchasing Managers’ Index compiled by Markit Economics climbed to 52.6 in April from 52 in March. Fifty is the dividing line between expansion and contraction.

The government said yesterday it will add 11.1 trillion won ($10 billion) of financial support this year for companies including small- to medium-sized exporters grappling with the sliding yen. While South Korea’s economy expanded at the fastest pace in two years in the first quarter, weakness in the Japanese currency threatens to undermine shipments of electronics, automobiles and steel. The won has gained 9.1 percent against the yen this year.

The won was little changed at 1,101.60 per dollar, according to data compiled by Bloomberg. It touched 1,098.15 earlier, the strongest level since March 13. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 12 basis points, or 0.12 percentage point, to 7.22 percent.

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