Korea Bond Traders See Central Bank Moving Toward Quantitative Easing

(Bloomberg) -- South Korean bonds rallied as the central bank was seen by traders as moving toward quantitative easing, even after it left benchmark rates unchanged.

Bond futures rose to a three-week high after the Bank of Korea said it will conduct outright purchases of up to 1.5 trillion won ($1.2 billion) of government bonds, a move similar to the one announced last month. The monetary authority could also consider a tool to target yields based on situations, Governor Lee Ju-yeol said earlier in the day while announcing more measures to boost liquidity.

“The Federal Reserve buys bonds issued by the U.S. government, and that helps stabilize market yields -- the BOK is expected to take on that similar role soon,” said Kang Seungwon, a fixed-income strategist at NH Investment & Securities Co. in Seoul. “South Korea’s government is sure to push forward with more stimulus, and that would require issuing more deficit bonds.”

South Korea’s 10-year bond futures extended gains and jumped as much as 108 ticks to 133.02 after the BOK released its buying plan. The yield on debt maturing in December 2029 was down 7 basis points at 1.44%, set for its lowest close since March 17.

The BOK was “significantly dovish, and seemed willing to take aggressive new steps,” said Lee Mi Seon, an analyst at Hana Financial Investment Co. in Seoul.

Thursday’s events have intensified expectations of traders and economists, many of whom already saw embarking on QE as the BOK’s next step after its 50 basis-point emergency rate cut in March and pledge for “unlimited” liquidity to financial institutions strained by the coronavirus pandemic.

“BOK is signaling it will aggressively increase bond purchases going forward, though for now the amount has been too small,” said Kang of NH Investment. “QE is different in that it targets specific maturities and size of bonds that the central bank purchases.”

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