Korean Bond Gains Push 10-Year Yield Down Most in Nine Months

  • Yield at record low as stocks drop and investors seek havens
  • Short-end yields down on rate-cut speculation: KB Investment

South Korean bonds rose, pushing the 10-year yield down the most in nine months, as investors sought shelter from an increasingly gloomy economic outlook and on speculation the central bank will cut interest rates.

Federal Reserve Chair Janet Yellen said in testimony to Congress that this year’s global market turbulence may delay further monetary tightening in the U.S., boosting demand for emerging-market assets. A 2.9 percent decline in the Kospi index, its biggest drop since 2012 as markets reopen after a three-day break, also increased the allure of government debt before the Bank of Korea reviews policy on Tuesday.

The yield on the notes due December 2025 dropped 12 basis points to 1.77 percent in Seoul, Korea Exchange prices show. That’s the biggest decline for a benchmark of that maturity since May 8, 2015, and the lowest level on record. The three-year yield fell six basis points to 1.45 percent.

"Korean government bond yields are falling today as demand for safe assets increases and long-end yields are falling especially sharply because market worries about a global recession have lasted longer than expected,” said Kim Myoung Sil, a fixed-income analyst at KB Investment & Securities Co. in Seoul. The drop in short-tenor notes seems to be driven by speculation the Bank of Korea will cut interest rates, she said.

The central bank has lowered its benchmark rate four times since August 2014 to a record 1.5 percent. All three economists surveyed by Bloomberg see it remaining on hold next week.

Policy makers should reduce borrowing costs as soon as this month to tackle sluggish growth and show they are doing everything they can to bolster the economy, Kang Myung Hun, who served as a monetary policy committee member from 2008-2012, said in an interview last week. The government and central bank forecast gross domestic product will increase at least 3 percent this year, compared with 2.6 percent in 2015.

The won fell 0.4 percent to 1,202.66 a dollar in Seoul after being up as much as 0.7 percent earlier, according to prices from local banks compiled by Bloomberg.

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