S. Korean bonds slump on strong inflation expectations

The South Korean bonds closed modestly lower on Monday as investors await April consumer price index (CPI) figure. Also, firm manufacturing PMI drove-out investors from safe-haven assets. The 10-year bonds yield, which is inversely propositional to bond price rose 0.84 pct to 1.808 pct and 3-year bonds yield climb 0.96 pct to 1.468 pct.

The South Korea’s headline inflation for April is expected to have accelerated slightly to 1.1% y/y from March’s 1%, according to Societe Generale. Meanwhile, the country’s inflation on a month-on-month basis is expected to accelerate to 0.2 pct in April from -0.3 pct in March. A moderate recovery is expected to have been observed in energy prices because of increase in crude oil prices, while fresh food prices are expected to be stable due to the seasonal patterns, noted Societe Generale. Public service prices and utility fares are also expected to have remained stable. Core inflation is likely to have recovered to 1.8 pct in April from March’s 1.7 pct. In addition, the April Nikkei manufacturing PMI rose to 50, as compared to 49.5 in March.

On the other hand, investors did not react to the weak April exports figure, which 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. On the other hand, in March the index of all industry production rose at steady pace of 0.6 pct, marking its 2nd successive monthly gain. Similarly, the March retail sales rose 4.2 pct m/m, from down 1.5 pct in February.

We expect the BOK to cut in May, after holding its benchmark at a record low 1.5 pct for 10-months. This is supported by the increasing speculation in the market that the BOK may cut borrowing costs that are already at a record low, pushing bonds prices further up. Meanwhile, The Korea Composite Stock Price Index (KOSPI) closed down 0.80 pct at 1,978.15 points.