South Korea’s biggest bond investors expect the Bank of Korea to lower borrowing costs again this year, as Thursday’s unexpected cut signals the nation’s economy has deteriorated.

The Bank of Korea unexpectedly reduced the benchmark seven- day repurchase rate to 3 percent from 3.25 percent, the first cut since February 2009, it said in a statement today in Seoul. Only two of 16 economists surveyed by Bloomberg News predicted the move, while the rest expected no change.

Samsung Asset Management Co., the nation’s biggest fund manager, sees the central bank lowering the seven-day repurchase rate to 2.75 percent within the year, according to Kim Young-sung, the Seoul-based head of fixed income at the company which oversees 124 trillion won ($108 billion).

“The act shows Korea’s economic data is deteriorating faster than expected, so we may see another cut as the situation worsens.”

The yield on 3.25 percent bonds due June 2015 slid 20 basis points, or 0.20 percentage point, to 3 percent at the close in Seoul, Korea Exchange Inc. prices show. Benchmark five-year rates dropped 25 basis points to 3.08 percent and the 10-year yield declined 21 basis points to 3.31 percent, both record-lows.

Three-year debt futures jumped 0.69 to 105.75 and the one- year interest-rate swap fell 31 basis points to 2.94 percent.

“The won has been faring well recently compared with its Asian peers, and it seems the central bank is concerned this may hurt exports,” said Moon Dong-hoon, who oversees 11 trillion won as the Seoul-based managing director in charge of fixed- income at KB Asset Management Co., a unit of South Korea’s second-largest bank holding group by assets.

The rate cut will be a way to support domestic consumption, according to Moon, who also predicts another reduction to 2.75 percent within the year. 

(Bloomberg)