Korea Bond Yields Drop to Records as BOK Signals Worst Not Over

  • Governor Lee cuts key rate and says downside risks to growth
  • Currency fell after decision before climbing on weak dollar

South Korean bond yields fell to a record as central bank Governor Lee Ju Yeol said monetary policy will remain accommodative after cutting the benchmark rate to an unprecedented low.

The decision to reduce the seven-day repurchase rate to 1.25 percent was foreseen only by Goldman Sachs Group Inc. in a Bloomberg survey of 18 economists. The won dropped briefly on the announcement before closing higher amid dollar weakness on signs the Federal Reserve will delay raising borrowing costs. Lee said at a briefing on Thursday that while the key rate is getting close to its lower limit, it doesn’t mean there won’t be any more cuts.

South Korea is about to embark on a massive restructuring plan for indebted companies, fueling concern it will weigh on the slowing economy. Interest-rate swaps dropped for a fifth day after Lee said downside risks to growth increased and the nation isn’t showing a clear recovery. Another rate reduction in the fourth quarter is possible if the weakness continues, according to Mirae Asset Daewoo Co. in Seoul.

The three-year government bond yield declined four basis points to an all-time closing low of 1.35 percent in Seoul, and the 10-year yield dropped to an unprecedented 1.67 percent, Korea Exchange prices show. The one-year swap rate slid seven basis points to 1.32 percent.

“I think the three-year yield will probably steady at current record lows,” said Kim Min Hyung, a fixed-income analyst at Mirae Asset Daewoo. “We don’t see any drastic moves until uncertainties including the Fed’s rate meeting and the U.K. vote on EU membership have cleared."

For a story on South Korean bonds in the run up to the rate decision, click here.

Sentiment for emerging-market assets got a further lift on Thursday as Brent crude extended a rally above $52 a barrel to the highest level since October. A measure tracking stocks in developing nations rose for a sixth day, the longest stretch since mid-April. The Bloomberg Dollar Spot Index dropped for a third day and was at its lowest level in a month.

South Korea’s inflation will remain below the 2 percent central bank target for some time, Lee said at the briefing after the rate cut vote, which was unanimous among the seven board members. The BOK lowered its growth estimate for this year to 2.8 percent in April from 3 percent previously.

The won was volatile, swinging between gains and losses. It closed up 0.1 percent at 1,155.90 per dollar, prices from local banks compiled by Bloomberg show. It fell as much as 0.3 percent after the rate decision.
“Now that the rate decision is out, the market has shifted its focus back to external issues such as the Fed’s monetary policy," said Jeon Seung Ji, a Seoul-based currency analyst at Samsung Futures Inc. “The rate cut will likely give a limited boost to the economy and domestic consumption. There are other basic problems for average Koreans such as rising housing prices and household debt."

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