S. Korean bonds close higher as BoK rate cut expectation looms

The South Korean government bonds finish week on a firm note on Friday as investors' expectations rose for further rate cuts from Bank of Korea after data showed that May exports contracted for a seventeenth straight month in May and consumer prices were nearly flat from April. The 10-year bonds yield, which moves inversely to its price fell two basis points to 1.743 percent and short-term 3-year bonds yield dipped more than two basis points to 1.424 percent by 8:45 GMT.

The South Korean consumer prices rose by 0.8 percent y/y in May, less than estimates for 0.9 percent y/y, from one percent in April. Industrial goods inflation mainly contributed to the headline inflation rate, down 0.9 per cent on-year and easing for a fifth straight month. Within industrial goods, inflation for mostly oil-related products saw declines, including gasoline, diesel and liquefied petroleum gas (LPG).

In addition, South Korea's exports shrank for a 17th consecutive month in May, fell by 6.0 percent y/y, greater than estimates for -0.4 percent y/y, from -11.2 percent in April.

Korean exports have been in decline since January 2015 due to sluggish global trade, lower oil prices and a slowdown in China--which takes in a quarter of Korea's total shipments overseas. Similarly, South Korea's imports declined by 9.3 percent y/y in May, less than estimates for -9.7 percent y/y, as compared to -14.9 in April.

According to Donn-A Ilbo newspaper, the South Korea's government will cut its 2016 growth forecast to below 3 percent from 3.1 percent when it releases economic policy plans for H216 in June.

The South Korea’s first quarter GDP expanded by 2.8 percent y/y, beating estimates for 2.7 percent y/y; in q/q terms, GDP expanded by 0.5 percent q/q seasonally adjusted in Q116, higher than previous estimates of 0.4 percent q/q seasonally adjusted.

According to Bloomberg's recent report, speculation is intensifying that the BOK will cut interest rates next month as Asia’s fourth-largest economy deals with slowing growth and massive restructuring in the shipping and shipbuilding industries.

While most economists predict the central bank will stand pat at its June 9 meeting. Meanwhile, The Korea Composite Stock Price Index (KOSPI) closed up 0.04 percent at 1,985.84 points.