Korea Tensions Push Bonds Down for Second Day; BOK Seen on Hold

  • All economists in survey see BOK keeping rate at 1.5% Tuesday
  • Foreigners turn net sellers of South Korean debt this year

South Korea’s bonds fell for a second day on speculation the central bank will refrain from easing monetary policy after tensions with North Korea prompted foreign funds to pull money from the nation’s debt.

The Bank of Korea will keep its benchmark interest rate at a record low 1.5 percent on Tuesday, according to all 15 economists surveyed by Bloomberg. Global investors, who had bought more local bonds than they sold this year through Thursday, turned net sellers on Friday when they withdrew $1.3 billion. Overseas funds have also sold $2.9 billion of shares in 2016.

The three-year sovereign yield rose one basis point to close at 1.49 percent in Seoul, four basis points off a record low reached on Feb. 11, Korea Exchange prices show. It fell below the BOK’s benchmark this month after a report showed exports slumped in January by the most since August 2009 and Japan adopted negative rates. The 10-year yield climbed one basis point to 1.83 percent, after falling to an unprecedented 1.77 percent on Thursday. 

"Investors are in a wait-and-see mode before the BOK meeting, so foreigners will be hesitant to buy bonds," said Seil Lee, a fixed-income analyst at Daewoo Securities Co. in Seoul, who expects the central bank to cut its policy rate to 1.25 percent in March. "The market is pushing for a rate-cut going forward, but the BOK is highly likely to stay put on Tuesday amid rising sovereign risks due to tensions with North Korea and a relatively weak won."

Won Weakens

Five of 24 economists in a separate Bloomberg survey predict the BOK will cut this quarter. The won has weakened 3 percent this year, Asia’s worst performance. The currency rose 0.3 percent to 1,208.03 a dollar on Monday, according to data compiled by Bloomberg.

North Korea’s Feb. 7 rocket launch escalated geopolitical tensions on the Korean peninsula. The recent events in the North can have a “temporary” impact on local financial markets and economic activities, Kim Eng Tan, a sovereign analyst at Standard & Poor’s, said in an e-mail to Bloomberg. S&P’s outlook on South Korea’s ratings remains stable, he said. The closure of an industrial park following the launch and the North’s nuclear test heightens geopolitical risks, Moody’s Investors Service said on Friday.

The cost of protecting South Korean bonds from default for five years reached 82.5 basis points on Thursday, the highest since September, according to CMA data. It was 79 basis points on Friday in New York.

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