Korea Bonds, Stocks Gain as Finance Minister Fuels Rate-Cut Bets

South Korean bonds jumped, driving the 10-year yield down by the most since October, and stocks extended a rally after the nation’s new finance chief flagged a possible interest-rate cut. The won pared gains.

Addressing parliament today after his official appointment by the president on July 15, Finance Minister Choi Kyung Hwan said the recovery in Asia’s fourth-largest economy is fragile. He said the government may have to lower its 3.9 percent 2014 growth forecast by more than 0.2 percentage point, and outlined plans to give tax breaks for companies that use surplus cash to increase dividend and wage payments.

“The market is expecting a rate cut in August and this is leading to more hopes that there may be additional stimulus,” said Lee Jin Woo, a Seoul-based money manager at KTB Asset Management Co., which oversees about $7.9 billion. “Institutional investors are buying more shares of exporters given a stabilizing won and the government’s plan to possibly boost dividends.”

The yield on the 3.5 percent sovereign notes due March 2024 dropped nine basis points, or 0.09 percentage point, to 2.95 percent in Seoul, Korea Exchange Inc. prices show. That’s the biggest decline since Oct. 23 for rates on similar-maturity debt. The yield on the 2.75 percent debt due June 2017 fell seven points to 2.51 percent, the biggest drop since July 2.

The Kospi index of local shares rose 0.4 percent, taking the week’s gains to 1.6 percent, and closed at the highest level this year.

Tax Benefits

The won closed 0.3 percent stronger at 1,029.32 per dollar after rising as much as 0.6 percent to 1,025.93 earlier, data compiled by Bloomberg show. One-month implied volatility, a gauge of expected swings in the exchange rate used to price options, climbed 10 basis points to 5.84 percent.

In response to a lawmaker’s suggestion today that the benchmark interest rate should be cut, Choi said his view on the economy was already made clear. The government is considering offering tax benefits for smaller companies to encourage initial public offerings and to help spur the stock market, Yonhap News reported today, without citing anyone.

“The won pared gains as some investors unwound previous short-dollar positions, but I don’t think new long positions are building up and the trend still points to won appreciation,” said Park Daebong, a Seoul-based currency trader for Nonghyup Bank. A short position is a bet an asset will decline in value.

South Korea’s government bonds returned 1.7 percent in the past month, the best performance among eight Asian local-currency debt markets tracked by Bloomberg.

The one-year interest rate swap fell four basis points to 2.49 percent, the lowest in Bloomberg data going back to 1999.

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