Korea Bonds Drop Most in Three Weeks as Stocks Join Global Rally

  • South Korea's Kospi index of shares climbs to two-month high
  • Daewoo Securities says rate-cut bets to limit bond weakness

South Korea’s bonds fell the most in almost three weeks as local shares rallied with global equities after China added monetary stimulus and U.S. manufacturing improved.

The benchmark Kospi index jumped 1.6 percent to a two-month high as Asian stocks extended gains on better-than-forecast U.S. factory data. China cut banks’ reserve requirements on Monday, fueling optimism that economic growth in South Korea’s biggest export market will stabilize.

The price of sovereign notes due December 2025 dropped the most since Feb. 12, pushing the yield up four basis points to close at 1.83 percent, Korea Exchange prices show. The three-year yield rose one basis point to 1.47 percent. The won appreciated 0.4 percent, the most since Feb. 10, to 1,227.47 a dollar, according to data compiled by Bloomberg.

"The improved emerging-market sentiment is leading to slightly higher yields," said Frances Cheung, the Hong Kong-based head of interest-rate strategy for Asia ex-Japan at Societe Generale SA. "However, this move is likely to be transient."

South Korea’s industrial production dropped 1.9 percent in January from a year earlier, official data showed Wednesday. The decline was bigger than the median estimate of a 0.6 percent contraction in a Bloomberg survey of economists. Eight of 23 economists surveyed by Bloomberg predict the Bank of Korea will lower its policy rate to 1.25 percent next week from a record low 1.5 percent.

The weakness in government bonds will by limited by expectation that the central bank will cut interest rates, Seil Lee, a fixed-income analyst of Daewoo Securities Co. in Seoul, wrote in a note on Wednesday.

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