Korean Bonds Drop on Concern Incoming BOK Chief May Raise Rates

South Korea’s government bonds declined on concern incoming central bank governor Lee Ju Yeol may raise interest rates.

The Bank of Korea’s current benchmark is accommodative and households need to prepare for higher rates, Lee said in prepared remarks to parliament ahead of his testimony before parliament today. He is set to take over from BOK Governor Kim Choong Soo when his term ends on March 31. The Federal Open Market Committee will today announce a $10 billion cut to the monthly bond purchases that have spurred emerging-market inflows, according to the median forecast in a Bloomberg survey.

“Investors are staying cautious as the nominee speaks today, especially as his recent comments reported by press signal the BOK may raise rates,” said Travis Choi, a Seoul-based fixed-income analyst at Woori Investment & Securities Co. “Key points to monitor would be how Lee responds to questions on the economy and inflation.”

The yield on the 3 percent notes due December 2016 rose one basis point, or 0.01 percentage point, to 2.85 percent as of 9:57 a.m. in Seoul, Korea Exchange Inc. prices show.

The central bank has kept borrowing costs unchanged at 2.5 percent since May. South Korean producer prices fell 0.9 percent in February from a year earlier, a 17th monthly decline, the central bank reported today.

The won declined 0.1 percent to 1,070.45 per dollar, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, dropped eight basis points to 7.41 percent.

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