Korea’s Three-Year Yield Declines to Record Low on Rate Cut Bets

South Korea’s government bonds rose, pushing the three-year yield to a record low, as minutes of the central bank’s February monetary policy review fueled speculation that a reduction in borrowing costs is imminent.

One of the Bank of Korea’s seven voting board members said at the Feb. 17 meeting there’s room for further interest rate adjustment, according to the minutes released Tuesday after local markets had closed. Another flagged an increasing risk of deflation and said there’s a need to reconsider whether the current level is appropriate. The BOK, which last month unanimously held its benchmark rate at 2 percent following cuts in August and October, next meets Thursday.

The yield on the 2 percent sovereign notes due December 2017 fell three basis points, or 0.03 percentage point, to 1.91 percent as of the 3 p.m. close in Seoul, Korea Exchange prices show. It reached 1.89 percent earlier, the lowest for a benchmark three-year security, according to data compiled by Bloomberg since 2000. The 10-year yield declined seven basis points to 2.32 percent.

“The minutes showed BOK board members are worried more about deflation than household debt, and that means a rate cut is possible as early as” Thursday, fixed-income analysts at NH Investment & Securities Co. led by Park Jong Youn in Seoul, wrote in a report today. NH Investment changed its rate outlook to a quarter-point cut in either March or April from an earlier prediction of no change in 2015, according to the report.

The central bank will leave its seven-day repurchase rate unchanged, according to 15 of 17 analysts surveyed by Bloomberg. Two expect a cut to 1.75 percent following similar reductions in August and October.

Bank loans to households rose to record 522.9 trillion won ($464.2 billion) in February as low borrowing costs and an improved housing market boosted demand for mortgages, the central bank said in statement today. Total lending has increased for 13 straight months.

The won weakened 0.3 percent to 1,126.35 a dollar, data compiled by Bloomberg show. The currency declined for a third day, the longest losing streak since Jan. 5, and reached 1,129.59 earlier, the lowest level since July 2013.

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