SEOUL: South Korean government bond prices jumped and the interest rate swap spread narrowed on Thursday as the crisis in Libya persuaded traders to reduce their expectations for an interest rate increase next month.
Rising oil prices on supply problems raises inflationary pressures and hurts economic activity, but traders expect the Bank of Korea to pay more attention to the impact on economic growth, analysts said.
"The unrest in the Middle East will have a serious effect on domestic economic activity, and so chances of an interest rate increase in March have eased much," said Park Hyoung-min, a fixed-income analyst at Tong Yang Securities.
The benchmark 5-year treasury bond yield fell 6 basis points to end at 4.27 percent while the liquid 3-year treasury yield dropped 8 basis points to 3.81 percent. March-delivery futures on 3-year treasury bonds rose 0.26 point to 103.09.
Investors had initially bet the Bank of Korea would increase interest rates in March after surprisingly skipping an increase in February as inflation kept growing.
The spread of 1-year interest rate swaps over the 3-month certificate of deposit rate narrowed by 4 basis points to 39 basis points, the smallest since Jan. 13, as investors trimmed their bets on a rate hike over the short term.
The won fell more than half a percent against the dollar to its weakest closing this year as firmer oil prices would increase demand for dollars from oil importers and as political unrest in the Middle East dented riskier assets.
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