S. Korean bonds gain on weak risk sentiments

The South Korean bonds closed modestly firmer Wednesday as investors pour into safe-haven assets amid deepening economic growth fears after reading steady April consumer price index (CPI) figure on Tuesday. Also, tumbling crude oil futures drove investors towards safe assets. The 10-year bonds yield, which is inversely propositional to bond price fell 1.23 pct to 1.772 pct and 3-year bonds yield dipped 0.55 pct to 1.434 pct.

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.

The South Korean bonds have been closely following developments in oil markets because of their impact on inflation expectations. Today, crude oil prices tumbled on concerns that slowing demand and rising Middle East production would extend a global supply overhang. The United States crude inventories rose by 1.3 million barrels in the week to April 29 to 539.7 million barrels, according to data from the American Petroleum Institute, which further weakened the investor sentiments. Also, Iraq said that its oil shipments from southern fields averaged 3.364 million barrels per day in April, up from 3.286 million in March and production from top exporter Saudi Arabia was 10.15 million barrels per day in April. The International benchmark Brent futures fell to $44.97, from yesterdays $45.56 and West Texas Intermediate (WTI) declined to $ 43.72, against yesterdays $44.40.

Released on Sunday, 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.

The investors will now focus on the BoK’s next rate-setting meeting, which is due on Friday, May 13. We expect the BOK to cut in May, after holding its benchmark at a record low 1.5 pct for 10-months. This is supported by the increasing speculation in the market that the BOK may cut borrowing costs that are already at a record low, pushing bonds prices further up. Meanwhile, The Korea Composite Stock Price Index (KOSPI) closed down 0.49 pct at 1,976.71 points.