S. Korean bonds rally on low inflation, weak exports

The South Korean bonds rallied on Wednesday after data showed that annual inflation in May cooled more than expected to a four-month low, as lower energy costs pulled prices further away from the central bank's target. Also, declining exports drove investors towards safe-haven assets. The 10-year bonds yield, which moves inversely to its price fell more than 5 basis points to 1.757 percent and short-term 3-year bonds yield dipped 6 basis points to 1.436 percent by 05:00 GMT.

South Korea's 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).

In addition, 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.

According to Donn-A Ilbo newspaper, the South Korea's government will cut its 2016 growth forecast to below 3 percent from 3.1 percent when it releases economic policy plans for H216 in June.

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 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 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) traded up 0.16 percent at 1,986.61 points by 05:00 GMT.