Korea Yield Below Benchmark Rate for Third Day on BOK Cut Bets

South Korea’s three-year sovereign bond yield was below the benchmark rate for a third day amid speculation the central bank will ease policy further.

Finance Minister Choi Kyung Hwan said Wednesday that while the country isn’t in deflation, concerns are growing. Official data this week showed inflation remained at a 15-year low in February. The Bank of Korea, which has kept its key rate unchanged after cutting it to 2 percent in October, next meets March 12. The won fell for a second day as the dollar rose before the European Central Bank reviews policy later Thursday.

“Expectation for a rate cut is reviving after government officials expressed concern about the economic situation,” said Yoon Yeo Sam, a Seoul-based fixed-income analyst at Daewoo Securities Co. “Although we don’t think the BOK will cut next week, it could signal a reduction in April.”

The three-year yield was little changed at 1.98 percent at the close of trading in Seoul, Korea Exchange prices show. It earlier fell to 1.97 percent, approaching the record 1.94 percent reached on Feb. 3. The five-year yield dropped two basis points, or 0.02 percentage point, to 2.07 percent, while that on 10-year bonds fell one basis point to 2.35 percent.

“Local brokerages are feeling uncomfortable buying bonds at these levels as the three-year yield is now below the benchmark rate,” said Moon Hong Cheol, a Seoul-based fixed-income analyst at Dongbu Securities Co. “Until recently, international investors drove the buying. Now some local investors are looking for opportunities to sell.”

Debt Inflows

Global funds added $233.1 million to their holdings of South Korean bonds this week, taking inflows in 2015 to $5.5 billion, data compiled by Bloomberg show. Foreign investors increased holdings by 642 billion won ($583 million) in February compared with 55 billion won in the previous month, the Financial Supervisory Service said in statement today.

The won fell 0.3 percent to 1,101 a dollar, data compiled by Bloomberg show. The Bloomberg Dollar Spot Index, a gauge of the greenback’s performance versus 10 peers, rose to the highest in more than 10 years.

South Korea’s external debt maturing in one year or less rose to $115.3 billion at the end of December from $111.8 billion the previous year, the central bank said in a statement today. BOK board member Hahm Joon Ho said on Feb. 27 that while the nation’s fiscal fundamentals are relatively sound, it should cautiously prepare for the risk of capital outflows as the U.S. is seen increasing interest rates soon.

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