Korean Bonds Rise, Won Weakens on BOK’s Monetary Easing Signal

South Korea’s bonds rose, pushing yields to record lows, after central bank Governor Lee Ju Yeol signaled prospects of more monetary easing.

The Bank of Korea will prioritize macroeconomic factors such as economic growth and inflation, Lee said in Seoul Monday after markets closed. The won headed for a third straight quarterly loss after the central bank unexpectedly lowered the benchmark interest rate to a record 1.75 percent on March 12. Government data Tuesday showed factory output contracted by the most since 2013.

“The BOK governor’s words fanned rate-cut expectations after he mentioned macroeconomic factors,” said Moon Hong Cheol, a Seoul-based fixed-income analyst at Dongbu Securities Co. “The three-year yield has room to fall as the market sees another rate cut to 1.50 percent.”

The yield on the December 2017 notes dropped five basis points, or 0.05 percentage point, to 1.73 percent as of the 3 p.m. close in Seoul, taking its decline this month to 31 basis points, Korea Exchange prices show. The 10-year yield fell one basis point Tuesday and fell 19 basis points in March to 2.16 percent. The yields were at the lowest in data compiled by Bloomberg going back to 2000.

The won weakened 0.4 percent Tuesday to 1,109.69 a dollar and is down 1.1 percent for the month, data compiled by Bloomberg show. The currency has declined 1.7 percent this year.

The central bank cut borrowing costs because inflation and growth are likely to “significantly” underperform previous forecasts, Governor Lee said at a briefing Monday to mark his first year in office. While it’s unlikely the economy will fall into recession or deflation, the central bank is on guard as the cost of such situations is “too big,” Lee said.

South Korea’s Industrial output decreased 4.7 percent in February from a year earlier, compared with the 2.5 percent drop forecast in a Bloomberg survey.

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