Korea Bonds in Weekly Drop as Vote Loss Dashes Debt Buying Plan

  • Ruling party had sought more aggressive monetary easing
  • Won extends rally on stock inflows as China data stabilize

South Korea’s government bonds posted their biggest weekly loss in six weeks as the ruling party’s unexpected electoral setback diminished its ability to push for aggressive monetary stimulus. 

Voters denied President Park Geun Hye’s Saenuri Party a majority in Wednesday’s parliamentary vote amid rising joblessness and slumping exports. The party had said in March it will ask the Bank of Korea to include direct purchases of mortgage-backed securities and Korea Development Bank bonds in its policy. The won rose the most in two weeks on Friday to complete a three-week rally, as equity inflows increased and improved Chinese data brightened the outlook for South Korea’s biggest overseas market.

“There was talk from the ruling party that they’ll push the BOK to do Korean-style quantitative easing," said Gary Yau, a strategist at Credit Agricole CIB in Hong Kong. "They lost the election, so the expectations of such a policy have receded."

The 10-year bond yield rose four basis points this week, the most since the five days ended March 4, to close at 1.84 percent in Seoul, according to Korea exchange prices. The three-year yield increased three basis points to 1.50 percent. Yields were little changed on Friday.

Election Result

The opposition Minjoo Party won 123 seats in the 300-seat National Assembly, edging out the Saenuri Party’s 122 seats, according to final results from the National Election Commission.

The won rose 0.9 percent Friday to 1,146.18 a dollar, taking its weekly gain to 0.7 percent, according to data compiled by Bloomberg. A report on Friday showed China’s gross domestic product matched estimates to increase 6.7 percent in the first quarter, while industrial output and retail sales picked up in March.

While the benchmark Kospi index snapped a two-day advance on Friday, foreign investors added to their holdings of local equities. Global funds have bought a net $724 million of shares this week, following an inflow of $344 million in the preceding five days.

The won slid 0.9 percent Thursday, the most in Asia after Singapore’s dollar, after the city-state’s central bank unexpectedly eased monetary policy and the greenback advanced.

"The movement today is probably a reaction to that over-reaction," Yau said. "The market tone remain one of risk-on in recent days despite the consolidation tone in equity markets today, and Chinese data this morning was also supportive."

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