Korean Bonds Drop as Faster Inflation Seen Keeping BOK on Hold

  • 10-year yield climbs to the highest level since September
  • Consumer price index rises more than forecast in October

South Korea’s government bonds fell, pushing the 10-year yield to the highest in more than five weeks, as a pickup in inflation supported bets the Bank of Korea will refrain from adding to interest-rate cuts this year.

Consumer prices rose 0.9 percent in October from a year earlier, Statistics Korea said Tuesday, more than the median forecast for a 0.7 percent increase in a Bloomberg survey. The central bank next reviews monetary policy on Nov. 12 after data last month showed growth in Asia’s fourth-largest economy accelerated last quarter.

The yield on sovereign notes maturing June 2025 climbed four basis points to close at 2.15 percent in Seoul, Korea Exchange prices show. That’s the highest since Sept. 24. The three-year yield rose one basis point to a six-week high of 1.67 percent.

"Investors will reduce trading and sell bonds to avoid the risk of higher yields in the short term on the outlook for monetary policy," said Seil Lee, a fixed-income analyst at Daewoo Securities Co. in Seoul. While faster-than-expected inflation will keep the BOK from cutting rates this year, it may do so next quarter as consumer-price gains still trail the central bank’s target of 2.5 to 3.5 percent, Lee said.

Yield Spreads

South Korean bonds have rallied this year as the BOK cut benchmark borrowing costs four times since August 2014 to battle deflationary pressures and an export-led growth slump. The nation’s aging population is also fueling demand for debt as workers preparing for retirement pool their savings in funds that favor fixed-income products.

Demand for longer-dated notes helped push the yield on 10-year sovereign bonds to below that on comparable U.S. Treasuries at the end of last month and narrowed their premium to shorter-dated domestic debt to the smallest since April. The 10-year yield was 47 basis points higher than that on three-year notes as of Monday, data compiled by Bloomberg show. The spread was 41 on Oct. 28.

One of seven BOK voting members said at a Oct. 15 meeting that nation’s inflation will accelerate in 2016, according to minutes released on Tuesday. The central bank held its key rate at a record low of 1.5 percent last month as it weighed a pickup in domestic activity amid a continued slump in exports.

The won strengthened 0.4 percent to 1,132.95 a dollar, data compiled by Bloomberg show, taking this quarter’s gain to 4.6 percent.

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