Sovereign debt yields hint at monetary easing

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Sovereign debt yields hint at monetary easing

Korean government bonds are sending 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’s next meeting is 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, which oversees the equivalent of $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 percent on Jan. 15, matching record lows last seen in 2009-10.

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

Yields on Korea’s three- and five-year bonds touched record lows of 1.94 percent and 2.01 percent, respectively on Tuesday. They traded at 1.98 percent and 2.07 percent at 9:58 a.m. in Seoul.

Ten-year sovereign yields fell to 2.21 percent 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. “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 percent against the Japanese yen and 11 percent versus the euro in the past six months, while weakening 5.1 percent against the dollar during the same period, data compiled by Bloomberg show.

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

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

“The current situation is different from the global financial crisis when rates were kept at 2 percent, as Korea’s exports were increasing then and economies were recovering fast due to coordinated policy synchronization,” said Kwon Young-sun, a Hong Kong-based economist for Nomura Holdings.

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

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

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