Korean Bonds Gain on Bets European Central Bank to Add Stimulus

South Korea’s government bonds advanced, sending the 10-year yield to an 11-month low, as speculation the European Central Bank will add stimulus to boost growth supported global notes.

Authorities need to be “particularly watchful” of low inflation, ECB President Mario Draghi said on May 26 as policy makers prepared for a June 5 meeting. South Korea’s current-account surplus was $7.12 billion for April, a 26th monthly excess, the Asian nation’s central bank reported today, while data this week showed consumer sentiment dropped to an eight-month low in May.

“Expectations for monetary accommodation from ECB supported global bonds, but I doubt the rally can continue further in Korea,” said Jung Won Suk, head of the fixed-income division at LS Asset Management in Seoul. “Too much optimism about economic recovery was followed by disappointment, but this may also be over as positive data starts to some in.”

The yield on the 3.5 percent notes due March 2024 fell four basis points today and 20 basis points this month to 3.33 percent at the close in Seoul, Korea Exchange prices show. That’s the lowest level for a benchmark 10-year bond since June 2013. The U.S. 10-year yield fell seven basis points to 2.44 percent yesterday.

South Korea’s won appreciated 0.1 percent to 1,020.60 per dollar, data compiled by Bloomberg show. It touched 1,020.50 earlier, the strongest since August 2008, and rose 1.2 percent this month. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, dropped 20 basis points, or 0.20 percentage point, today to 5.61 percent.

The “very strong” current-account surplus should help the won test the 1,020 per dollar level, Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a note to clients today. “It will be difficult to break the level given Bank of Korea interventions but the won does have some tailwinds.”

The surplus will continue in May, Roh Chung Seak, head of the Bank of Korea’s balance of payments team, said at a press conference today.

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