S. Korean bonds rise modestly on BoK’s easing expectation

The South Korean bonds closed modestly firmer on Monday as investors expect further Bank of Korea (BoK) easing in the up-coming monetary policy meeting due on Friday. The 10-year bonds yield, which is inversely propositional to bond price fell 0.96 pct to 1.757 pct and 3-year bonds yield dipped 1.40 pct to 1.412 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 jumped by more than 1 pct as a huge wildfire in Canada disrupted its oil sands production and strong Chinese oil imports last month. China’s crude imports rose 7.6 pct y/y in April, the third straight month that crude imports surpassed 30 million tons. The International benchmark Brent futures rose 0.84 pct to $45.75 and West Texas Intermediate (WTI) climbed 1.75 pct to $ 45.44 by 0730 GMT.

"Oil prices held as concerns over the impact of raging fires in Alberta,Canada, on supply from the oil sands projects lingered," said ANZ economists in a research note on Monday.

Meanwhile, The Korea Composite Stock Price Index (KOSPI) closed down 0.45 pct at 1,967.81 points.