S. Korean bonds slump as BoK Governor Lee remains optimistic on economic, inflation growth

The South Korean government bonds slumped Tuesday as the Bank of Korea Governor Lee Ju Yeol remianed optimistic on inflation and economic growth during its latest speech. Also, growth in foreign direct investment (FDI) in the third quarter of 2016 discouraged investors from safe-haven buying.

The 10-year bonds yield, which moves inversely to its price, rose 5-1/2 basis points to 1.465 percent and short-term 3-year bonds yield jumped nearly 3 basis points to 1.276 percent.

South Korea's central bank governor Lee said that does not need to raise interest rate immediately after the Fed hikes interest rate; the Fed is seen raising interest rate once in 2016; the CPI is projected to rise by 1.0 percent y/y in 2016; the BoK can ease monetary policy more if needed; the central bank has space to cut and raise interest rates.

He added that South Korea’s past rate cuts of 25 basis points supported GDP growth by 0.05 percentage points in the year the reduction was made, and by 0.02 percentage points in the following year; 25 basis points rate cut also supported CPI growth by 0.03 percentage points in the year the reduction was made and by 0.05 percentage points in the following year.

Moreover, South Korea FDI rose by 2.1 percent y/y (hits a new record high in the first nine months of the year) in the third quarter of 2016 after registering 18.8% y/y growth in the previous quarter.

Meanwhile, The Korea Composite Stock Price Index (KOSPI) traded 0.51 percent higher at 2,054.01 points.