South Korean Bonds Drop as Investors Await Central Bank Meeting

South Korea’s government bonds fell for the first time this week, chasing a drop in Treasuries, as investors awaited the outcome of a central bank policy meeting set for tomorrow.

The Bank of Korea will probably hold its benchmark rate at 2.5 percent, according to all 19 economists in a Bloomberg survey. The nation’s unemployment rate was 3.7 percent in May, unchanged from April, official figures showed today. There is a risk of an economic slump if consumer sentiment remains depressed for long, President Park Geun Hye told her cabinet yesterday, according to a statement on the government’s website.

The yield on the 3.5 percent notes due March 2024 rose one basis point, or 0.01 percentage point, to 3.36 percent at the close in Seoul, according to Korea Exchange prices. It declined four basis points in the last two days.

“It’s time the bond market took a breather from the recent rally,” said Kong Dong Rak, a fixed-income analyst at Hanwha Investment & Securities Co. in Seoul. “Investors are waiting for the central bank governor to give a clearer direction on whether slowing consumption will continue to drag the economy.”

In the U.S., benchmark 10-year yields climbed four basis points to 2.64 percent yesterday. Data this week will probably show retail sales in the world’s biggest economy increased in May, according to the median estimate of economists polled by Bloomberg. South Korea’s consumer confidence in May was the lowest since September, official figures showed.

Won Advances

The won appreciated 0.1 percent to 1,015.80 per dollar at the close, data compiled by Bloomberg show. It touched 1,015.25 yesterday, the strongest level since August 2008. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 10 basis points to 5.02 percent, according to data compiled by Bloomberg. It touched 5.01 percent earlier, the lowest since January 2013.

The authorities are concerned about spikes in exchange rate near market close in Seoul and are reviewing measures to reduce volatility, Finance Ministry director Kim Seong Wook said by phone yesterday.

MSCI Inc. said yesterday that it removed South Korea from potential reclassification to a developed-market status due to little improvement in areas such as currency convertibility. This is positive for the won, Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, said in an e-mail interview.

“Had the won been reclassified as developed market, it would have resulted in a significant capital outflow as funds are forced to rebalance,” Trinh said. “The fact that they have been taken off the review list is even more positive from a capital flow perspective.”

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