Bond Traders Bet Bank of Korea Will Cut Again

(Bloomberg) -- South Korean bond markets are suggesting the central bank will follow up Thursday’s unexpected interest-rate cut with at least one more amid slowing economic growth and a simmering trade dispute with Japan.

The nation’s three-year yield fell to 1.35% after the decision, putting it well below the new benchmark rate of 1.5%. Bank of Korea lowered its seven-day repurchase rate from 1.75%, while trimming its forecasts for economic growth and inflation.

“Yields are falling after the BOK cut its rate, which implies the economy is in a grave situation,” said Lee Mi Seon, an analyst at Hana Financial Investment in Seoul. “Should the sluggish trend continue the BOK may deliver another cut within the year.” Three-year yields may fall as low as 1.25% in there are more rate cuts to come, Lee said.

Korea’s money markets are also signaling the prospect of lower rates. Traders are pricing in another 25 basis-point rate cut in around the next six months, with a good chance of a another during the following year.

Korean bonds have rallied in recent months, with three-year yields falling from as high as 1.84% in March, as slowing growth has hurt the nation’s semiconductor industry and the ratcheting up of a trade row with Japan spurred demand for the safety of the nation’s debt.

The BOK’s rate cut is now just 25 basis points above a record low. BOK Governor Lee Ju-yeol said the central bank still has room to act again, but not much given concerns about financial stability.

Thursday’s rate cut “was a surprise, and we thought that they would have waited a little longer,” Kwon Goohoon, senior Asia economist at Goldman Sachs Group Inc., said in an interview on Bloomberg Television. Bank of Korea is likely to deliver another cut even though it doesn’t have a lot of room for further easing, he said.

--With assistance from Stephen Spratt, Yvonne Man and David Ingles.

To contact the reporters on this story: Ruth Carson in Singapore at rliew6@bloomberg.net;Hooyeon Kim in Seoul at hkim592@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Liau Y-Sing, Nicholas Reynolds

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