Korea Yields Plunge as Poor Trade Data Intensifies Rate-Cut Odds

  • BOK minutes showed one of seven members saw need for easing
  • China, Australia data spurred gain in won before closing lower

South Korea’s three-year government bond yield fell by the most this year after disappointing trade data added to speculation the central bank will lower interest rates for the first time in 12 months.

The yield dropped six basis points to 1.45 percent, below the Bank of Korea’s record-low benchmark rate of 1.5 percent. Swaps declined for a second day after minutes of the most recent central bank meeting in May showed one of the seven board members saw the need for a cut in the “near term." Data Wednesday showed exports contracted for a 17th straight month, contributing to the smallest current-account surplus since June 2014.

“The market is reacting as rate-cut expectations are building up,” said Moon Hong Cheol, fixed-income strategist at Dongbu Securities Co. in Seoul. “The market sees a cut happening either in June or July, but I think June is more likely."

The one-year interest-rate swap declined five basis points to 1.43 percent in Seoul, data compiled by Bloomberg show. The 10-year yield fell five basis points to 1.76 percent, the biggest drop since March 17.

Currency Reaction

South Korea’s won reversed earlier gains to close lower. It rose as much as 0.3 percent in the morning after better-than-expected China manufacturing and Australia growth numbers raised some optimism about the health of the global economy. U.S. factory output and employment numbers this week will be watched to get a firmer grasp of when the Federal Reserve will likely raise interest rates.

“The won was boosted by the strength in the Australian growth figures,” said Min Gyeong Won, an analyst at NH Futures Inc. in Seoul. “But gains were lost in the afternoon session as the market decided to take a wait-and-see stance before the U.S. job data."

The currency was 0.1 percent lower at 1,193.02 per dollar by the close on Wednesday, after posting its worst monthly loss since July. While it’s down the most in Asia this year after the Indian rupee, the weakness could offer some support to South Korea’s exporters.

Overseas shipments contracted 6 percent in May from a year earlier, compared with the median estimate in a Bloomberg survey for a 0.4 percent drop, data showed Wednesday. The current-account surplus for April shrank to $3.37 billion, from more than $10 billion in March. It was the lowest reading since January 2014.

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