South Korea Bonds Rally Amid Signs Fed Will Delay Rate Increase

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South Korean government bonds rose amid speculation the U.S. will delay increasing borrowing costs.

Minutes of the Federal Reserve’s July meeting showed officials are worried about low inflation even as they indicated that an improving job market is bringing them closer to the first interest-rate rise in almost a decade. A U.S. rate increase would damp the allure of South Korean debt, which has attracted $2.6 billion of inflows this month.

The yield on the 10-year bonds dropped three basis points to 2.28 percent in Seoul, Korea Exchange prices show. The three-year yield declined one basis point to 1.72 percent.

“The possibility of a Fed rate increase next month seems to be less after the July minutes,” said Kim Myoung Sil, a fixed-income analyst at KB Investment & Securities Co. in Seoul. “Korean bond yields will continue to have downward pressure due to uncertainties in the Chinese economy and the U.S. monetary policy outlook.”

Chinese authorities devalued the yuan by the most in two decades last week and are also grappling with a falling stock market and slowing economic growth. China is South Korea’s largest export market.

South Korean producer prices declined 4 percent in July from a year earlier, following a 3.6 percent drop in June, the central bank reported Wednesday.

The won erased an earlier gain and closed little changed from Wednesday at 1,185.17 a dollar, data compiled by Bloomberg show. The currency has weakened 8 percent this year.

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