S. Korean bonds flat ahead of BoK’s policy decision, likely to rally on easing expectations

The South Korean bonds closed flat Tuesday as investors await up-coming monetary policy decision due on Friday. The 10-year bonds yield, which is inversely propositional to bond price stood unchanged at 1.767 pct and 2-year bonds yield remained steady at 1.432 pct.

The Bank of Korea's monetary policy committee meets on May 13th to set the 7-day policy interest rate, which has been left unchanged at record-low 1.5 pct after seven rounds of reduction until June last year. We expect the BOK to cut this time, after holding its benchmark at a record low 1.5 pct for 9-months. This is supported by the recent reading of poor economic data- the April exports declined 11.2 pct y/y, against market expectation of 11 pct y/y fall, from down 8.1 pct in March. Similarly, the South Korea's industrial production tumbled 2.2 pct m/m in March, against expectation of 0.1 pct m/m rise, from up 3.2 pct in February. On annual basis, it declined 1.5 pct in March; investors were waiting for a rise of 0.8 pct, as compared to prior 2.2 pct.

In addition, the South Korea’s headline inflation for April stood at 1 pct y/y, in line with market expectation, as compared to 1 pct in March, mirroring the impacts of weak worldwide oil costs, and darkening the economy's progressing unassuming recuperation. Similarly, it rose 0.1 pct m/m, from a drop of 0.3 pct in March, which boosted investors sentiments for further BoK easing.

The South Korean bonds have been closely following developments in oil markets because of their impact on inflation expectations. Today, crude oil prices as output threat due to Canadian wildfire eases along with reviving concerns of a growing supply glut. Crude oil prices came under more pressure after private information forecaster Genscape Inc. said stock at key U.S. delivery hub in Cushing, Okla. jumped 1.4 million barrels. Investigators studied by Platts gauge U.S. rough stocks to have expanded 300,000 barrels in the most recent week. The International benchmark Brent futures fell to $43.82, from $46.19 in the earlier session and West Texas Intermediate (WTI) dipped to $43.39, as compared to $45.22 in the previous session.

Meanwhile, The Korea Composite Stock Price Index (KOSPI) closed up 0.75 pct at 1,982.50 points.