South Korean government bond prices fell sharply on Friday as the central bank delivered only a modest interest rate cut and indicated it preferred to boost liquidity to resolve the credit crunch. With the central bank pledging to inject cash to the markets by purchasing the unpopular bank bonds next week, investors quickly shifted from treasuries to riskier debt instruments.
The Bank of Korea joined the latest global wave of policy easing along with the European Central Bank and Bank of England by cutting the base rate by 25 basis points early on Friday. The modest cut disappointed some analysts who had hoped up to 50 basis points would be taken off the key rate. The yield on benchmark 5-year treasury bonds jumped 18 basis points to 4.94 percent while December treasury bond futures ended up 63 ticks at 109.84, sliding from an earlier gain of as much as 34 ticks.
"Disappointment at the marginal rate cut and uncertainty over future rate action, investors dumped government bonds to purchase cheap debt instruments issued by banks and companies," said Yoon Yeo-sam, a fixed-income analyst at Daeoo Securities." "The central bank will continue to cut rates further but not in such a dramatic way as seen in October," Yoon said. On Friday, the Bank of Korea trimmed its base rate by 25 basis points to 4.00 percent, the lowest since June 2006, adding to rate cuts totalling 1 percentage point in October.
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