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South Korean treasury prices rose across the board on Wednesday, pricing in market expectations that the Bank of Korea would keep interest rates on hold for a second month. The latest set of data added to optimism of a solid recovery in Asia's fourth-largest economy, with South Korea adding jobs at the fastest pace in seven months in December.
But with the government set to release a package of administrative measures on Thursday to curb soaring inflation, traders increased their bets on a hold in the policy rate this week. Longer-dated bonds led the price gains after they had been hit by speculation about a near term rate rise.
The yield on the benchmark five-year treasury bonds dropped five basis points to close at 4.21 percent. The March contract on three-year treasury futures spiked 0.25 points to 103.20 in a last-minute rally. "Taken together with the inflation outlook, the Bank of Korea faces a difficult balancing act - weighing the risks of external uncertainties especially in Europe against a domestic economy that is bottoming out after a brief mid-cycle slowdown," Barclays Capital economist Wai Ho Leong said in a note. "Our base case is that the first rate rise this year occurs in February."
The South Korean won bounced to a two-year closing high against the dollar, lifted by growing appetites for risk assets such as the euro and the yuan and as foreign investors capped their recent selling run in stocks. The won ended local trade at 1,119.4 per dollar, its strongest finish since November 11.
It has been mostly in an upward streak since late last year, gaining 3.2 percent to the dollar over the past two weeks, as a raft of upbeat economic data brightened the export outlook. Foreign investors bought a net 308 billion won worth of shares on the Seoul bourse, capping their selling run of the past three sessions.

Copyright Reuters, 2011

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