Korea’s 5-Year Yield Jumps Most in Four Years on BOK; Won Climbs

South Korea’s bonds fell, spurring the biggest increase in five-year yields since May 2009, after the central bank unexpectedly refrained from cutting borrowing costs. The won rose the most in more than two weeks.

Bank of Korea Governor Kim Choong Soo and his board held the benchmark seven-day repurchase rate at 2.75 percent, the monetary authority said in a statement in Seoul today. Eleven of 20 economists surveyed by Bloomberg News forecast a reduction as tensions with North Korea threaten to damp business and consumer sentiment. The won advanced as global funds boosted holdings of local shares.

“It was a shock to the market simply that the Bank of Korea went the opposite way with its interest rate decision than what was expected,” said Lee Jae Seung, a fixed income strategist at KB Investment & Securities Co. in Seoul. “The anticipated rate cut was already priced in the bonds market, and now investors are running away.”

The yield on the 2.75 percent government notes due March 2018 rose 20 basis points, or 0.20 percentage point, to 2.78 percent in Seoul, according to prices from Korea Exchange Inc. That’s the biggest jump since May 4, 2009.

The cost to lock in borrowing costs for one year using interest-rate swaps jumped nine basis points to 2.68 percent, data compiled by Bloomberg show. That is the biggest increase since March 3, 2011. The Kospi Index of shares swung between gains and losses before closing 0.7 percent higher at 1,949.80.

Won Advances

The won extended gains immediately after the rate decision, rising as much as 0.9 percent, before paring its advance as North Korea showed signs of proceeding with a missile test. The currency strengthened 0.6 percent to 1,129.25 per dollar at the close of trading, the biggest jump since March 25, according to data compiled by Bloomberg. An intelligence satellite showed a North Korean missile launchpad in east of the country moved to face skyward, Kyodo News reported, citing an unnamed Japanese Defense Ministry official.

One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, fell 37 basis points to 10.07 percent.

The timeframe for a North Korean missile launch is until around April 15, South Korea’s defense ministry spokesman Kim Min Seok said today. The date marks the birth anniversary of the totalitarian state’s founder, Kim Il Sung. The North may detonate a nuclear device or carry out a missile test as early as this week, the ministry said on April 8.

‘Bellicose Rhetoric’

U.S. Defense Secretary Chuck Hagel said yesterday at a Pentagon news conference that North Korea has “been skating very close to a dangerous line” and should tone down its “bellicose rhetoric” to ease mounting tensions in the region.

South Korean President Park Geun Hye is preparing to roll out fiscal stimulus after the finance ministry said yesterday that prolonged geopolitical risks may exacerbate economic weakness. While the nation is wrestling with elevated household debt, a stagnant property market and weakness in the yen that helps competitors in Japan, Governor Kim said today interest rates are “accommodative.”

The Bank of Korea today cut this year’s economic growth forecast to 2.6 percent from 2.8 percent. That follows the finance ministry’s reduction in March to 2.3 percent from December’s 3 percent estimate.

“The won briefly soared as the central bank kept rates unchanged,” said Jeon Seung Ji, a Seoul-based currency analyst for Samsung Futures Inc. “The currency is receiving a bout of support from foreign buying of local stocks and easing tensions linked to North Korea’s missile tests.”

The Bank of New York Mellon Korea ADR Index, which tracks American depositary receipts of South Korean companies in New York, jumped 2.3 percent yesterday, ending seven days of declines, the longest losing streak in more than two months.

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