Korean Bonds Rise as MERS Risk to Economy Spurs Rate-Cut Calls

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South Korea’s government bonds rose as the outbreak of a deadly virus spurred calls for policy makers to support the economy by cutting interest rates.

The spread of the Middle East respiratory syndrome increases uncertainty for the economy, the Finance Ministry said in a monthly report Tuesday, as a seventh person died from the disease. President Park Geun Hye asked her cabinet to prepare “all preemptive measures” to minimize the impact. The fallout will prompt the Bank of Korea to lower borrowing costs Thursday to shore up confidence and activity, Capital Economics wrote in a report Monday.

The 10-year yield declined five basis points to close at 2.44 percent in Seoul, Korea Exchange prices show. The five-year yield fell four basis points to 2 percent, while that on three-year sovereign notes was steady at 1.74 percent. The one-year interest-rate swap was little changed at 1.66 percent.

“Consumer sentiment is weakening due to the MERS outbreak, and this heightens calls for monetary stimulus,” said Kim Myoung Sil, a fixed-income analyst at KB Investment & Securities Co. in Seoul. “Before the BOK meeting, the short-term yield will be more likely to fall on rate-cut expectations.”

The won rose 0.4 percent to 1,118.81 a dollar, according to prices compiled by Bloomberg. The currency declined the most in three months Monday and has weakened 2.5 percent this year.

The Health and Welfare Ministry reported eight more patients, bringing the number of confirmed cases to 95 as of Tuesday morning. The government will closely monitor any impact on consumption and services and take measures if needed, the Finance Ministry said.

Ten of 18 economists surveyed by Bloomberg predict the central bank will cut its benchmark interest rate by 25 basis points to an unprecedented 1.50 percent this week. The rest see no change. Monetary and fiscal policies are needed to support growth and strengthen economic fundamentals before the Federal Reserve raises U.S. interest rates, BOK Governor Lee Ju Yeol said Monday.

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