Korean bonds send message on rates as monetary easing spreads

[SEOUL] South Korean government bonds are telegraphing a message that the central bank hasn't given: the nation may be one of the next to ride the wave of global monetary easing.

While Governor Lee Ju Yeol has said there's "limited" risk of deflation and that the economy should improve this year, the yield on three-year sovereign debt dropped below benchmark borrowing costs this month. That mirrors moves in Korean bonds in the weeks before Lee's policy board cut interest rates in August and October.

More than a dozen central banks from China to Canada have eased monetary policy this year as nations seek to bolster growth and ensure price gains. The Bank of Korea's policy board next meets on Feb 17.

"The BOK won't be able to overlook what other central banks are doing," said Moon Dong Hoon, the Seoul-based head of fixed income at KB Asset Management Co, which oversees the equivalent of US$36 billion of investments. "There is plenty of justification to lower rates with inflation slow, growth not so solid and the won relatively strong." The Bank of Korea policy board unanimously agreed to hold the seven-day repurchase rate at 2 per cent on Jan 15, matching record lows last seen in 2009-2010.

Moon expects as many as two rate reductions in 2015. Twelve of 23 analysts surveyed by Bloomberg last month forecast a 25 basis point cut to 1.75 per cent this quarter. The rest estimated no change.

Yields on South Korea's three- and five-year bonds touched record lows of 1.94 per cent and 2.01 per cent, respectively on Tuesday. They traded at 1.98 per cent and 2.07 per cent at 9.58 am in Seoul.

Ten-year sovereign yields fell to 2.21 per cent on Tuesday, the lowest in data compiled by Bloomberg going back to 2000.

"Recent global easing will put pressure on the BOK and some bond investors are expecting a cut as early as this month," said Shin Hong Sup, a Seoul-based fixed-income analyst for Samsung Securities Co. "The BOK will act when the won appreciates further and data deteriorates. A cut in March or April seems likely." The won strengthened 9.2 per cent against the Japanese yen and 11 per cent versus the euro in the past six months, while weakening 5.1 per cent against the dollar during the same period, data compiled by Bloomberg show.

Exports from Asia's fourth-biggest economy fell 0.4 per cent in January from a year earlier, a third monthly contraction during the past six months.

Sales to China dropped 4.5 per cent during Jan 1-20 from the previous year, while exports to the euro area and Japan fell 26 per cent and 22 per cent, respectively, a trade ministry report showed.

"The current situation is different from the global financial crisis when rates were kept at 2 per cent, as South Korea's exports were increasing then and economies were recovering fast due to coordinated policy synchronisation," said Kwon Young Sun, a Hong Kong-based economist for Nomura Holdings Inc.

The BOK may bring forward a rate cut to February or March, according to Kwon.

The economy expanded 0.4 per cent in the three months through December from the previous quarter, the slowest pace in more than two years. Industrial output increased 3 per cent in December from the previous month, the biggest jump September 2009.

The central bank lowered its growth projection for 2015 to 3.4 per cent from 3.9 per cent on Jan 15, while cutting inflation forecast to 1.9 per cent from 2.4 per cent.

BLOOMBERG