S. Korean bonds rally after BoK surprises markets with a rate cut

South Korean government bonds strengthened on Thursday after the Bank of Korea unexpectedly lowered its key policy rate by 25 basis points to new record low of 1.25 percent.

The 10-year bonds yield, which moves inversely to its price fell 4 basis points to 1.663 percent, short-term 3-year bonds yield dipped more than 3 basis point to 1.350 percent and the super-long 20-year bonds yield also slid 3-1/2 basis point to 1.768 percent by 06:00 GMT.

The Bank of Korea’ (BoK) monetary policy board member decided to lower the nations benchmark lending rate by 25 basis points to new recode low of 1.25 percent, from previous 1.5 percent. This decision was supported by the neutral and exceedingly low inflation.

South Korea's central bank governor Lee said that today's rate cut decision was unanimous and monetary policy will continue to remain accommodative. He further added that the economic growth path will be weaker than expected and inflation will remain below 2 percent for some time, downside risks to growth have increased for H216. Similarly, South Korea's Finance minister Yoo said that economy is likely to benefit from the BoK's interest rate cut.

South Korean 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% y/y, as compared to -14.9 in April.

The Korean 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.

In addition, the South Korean consumer prices just rose 0.8 percent y/y in May, less than estimates for 0.9 percent y/y, from 1 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).

Meanwhile, The Korea Composite Stock Price Index (KOSPI) closed down 0.14 percent at 2,024.17 points.