Korea Bonds Rally a Sixth Week as Finance Chief Pushes GrowthJiyeun Lee and Kyoungwha Kim
South Korea’s 10-year sovereign bonds rallied for a sixth straight week and the won fell as the new finance minister’s comments on growth raised the possibility of an interest-rate cut.
The economy is in a “very difficult situation” and policies need to be executed swiftly, Finance Minister Choi Kyung Hwan said in Seoul today. Asked by a lawmaker yesterday if the benchmark rate should be lowered, Choi said that while monetary policy is the central bank’s mandate, he has made clear how he views the economy.
“I don’t believe the economy needs lower interest rates, but the bond market isn’t reacting to economic factors at the moment,” said Jung Won Suk, head of the fixed-income division at LS Asset Management in Seoul. “Political pressure is driving bonds, and it seems investors believe if there is a cut, it should be twice to be enough to support growth.”
The yield on the 3.5 percent government notes due March 2024 dropped nine basis points this week and rose three basis points today to 2.97 percent in Seoul, Korea Exchange Inc. prices show. The decline is the biggest for similar-maturity sovereign debt in a month. The yield on the 2.75 percent debt due June 2017 fell seven basis points from July 11 to 2.52 percent.
The finance ministry will announce a revised economic outlook next week. The last one issued in December showed the government expects gross domestic product to expand 3.9 percent in 2014. The central bank reviews the benchmark rate on Aug. 14, after holding borrowing costs for a 14th month in July.
The won fell 1 percent from July 11 and was little changed today at 1,029.32 per dollar, data compiled by Bloomberg show. That’s the biggest weekly drop since March. One-month implied volatility, a gauge of expected swings in the exchange rate used to price options, jumped 120 basis points, or 1.2 percentage points, this week and 34 basis points today to 6.08 percent.