Korea Three-Year Bond Yield Falls to Record Low as Rate Cut Seen

South Korea’s bonds gained, pushing the three-year yield to a record low, as inflation came in below estimates and minutes of the last central bank meeting showed support for another cut in the policy rate.

The yield on the 2.75 percent notes due June 2017 declined seven basis points, or 0.07 percentage point, to 2.23 percent at the close in Seoul, Korea Exchange prices show. That was the lowest level for a benchmark of that maturity since Bloomberg began compiling the data in 2000, and followed a 21 basis point drop in September. The yield on the five-year debt fell seven basis points to 2.43 percent.

Consumer prices rose 1.1 percent in September from a year earlier, the least in seven months and below the lowest forecast in a Bloomberg survey of 17 economists, official figures showed today. Bank of Korea board member Chung Hae Bang opposed the decision to hold the the key rate last month, minutes of the latest meeting released after market closed yesterday showed. Another member of the seven-person monetary-policy committee said easing in Europe and Japan created conditions suitable for a reduction.

“There were two members who agreed on the need for a rate-cut in the minutes,” said Shin Hong Sup, a fixed-income strategist at Samsung Securities Co. in Seoul. “Low inflation figures also show there is room for lower rate. The three-year yields have already priced in an additional cut.”

Won Weakens

The BOK held its benchmark rate at 2.25 percent on Sept. 12 after reducing it by 25 basis points in August in the first cut since May 2013. It next reviews policy on Oct. 15.

Exports rose 6.8 percent in September from a year earlier, compared with a revised 0.2 percent drop in August, the trade ministry reported today.

South Korea’s won dropped as the dollar strengthened above 110 yen for the first time since August 2008.

The won weakened 0.7 percent to 1,062.49 per dollar, according to data compiled by Bloomberg. It earlier touched 1,064.51, the lowest since April 1. The currency has lost 2.1 percent in a six-day declining streak. It fell 0.5 percent against the Japanese yen to 9.67 after reaching a six-year high of 9.51 on Sept. 25.

Authorities will actively respond to volatile yen-won movements, the Maeil Business Newspaper reported today, citing unidentified officials.

One-month implied volatility, a gauge of expected swings in the exchange rate used to price options, jumped 40 basis points to 8.60 percent.

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