S. Korean bonds rise modestly ahead of BoK policy decision

The South Korean government bonds traded modestly firmer on Wednesday as investors were cautious ahead of the Bank of Korea (BoK) policy meeting. On the contrary, crude oil prices scaled beyond the $50 mark in the Asian session, which limited the fall in bond yields.

The 10-year bonds yield, which moves inversely to its price fell ½ basis points to 1.708 percent, short-term 3-year bonds yield dipped more than 1 basis point to 1.391 percent and the super-long 20-year bonds yield also slid 1 basis point to 1.805 percent by 05:15 GMT.

The Bank of Korea (BOK) is expected to keep rates unchanged at its policy meeting scheduled on June 9 following the pickup in domestic demand over the past one month, owing to expansion in fiscal stimulus.

The central bank of Korea is expected to hold rates steady at 1.50 percent. Korea’s services output gained a 0.5 percent m/m, seasonally adjusted while, retail sales slipped -0.5 percent in April after rising 4.3 percent in March, but the payback was largely technical and the underlying trend remained strong. These should provide reasons for the BOK to maintain status quo on monetary policy for the time being, DBS reported.

In addition, the Korean bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Korea's target. Today, crude oil prices jumped beyond $50 mark by hitting 2016 high as supply disruptions in Nigeria and likely declines in the U.S. crude inventories and production fuelled bullish sentiment. The International benchmark Brent futures rose 0.08 percent to $51.48 and West Texas Intermediate (WTI) jumped 0.20 percent to $50.46 by 05:15 GMT.

Moreover, South Korea’ 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.

The South Korean consumer prices rose by 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).

On the other hand, 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% y/y, as compared to -14.9 in April.

The Bank of Korea’s Monetary Policy Board in its May monetary policy meeting unanimously decided to maintain the key policy rate at 1.5 percent and also did not make any considerable changes in May’s policy statement. According to the monetary policy’s board concluded that the global economy will continue with its recovery, but at a slower pace. Meanwhile, the central bank of Korea foresees a modest rebound in the Korean economy, especially domestic demand. However, it is highly uncertain regarding the growth trajectory and projected the CPI inflation to remain at low levels.

Meanwhile, The Korea Composite Stock Price Index (KOSPI) closed up 0.77 percent at 2,027.08 points.