South Korean government bond prices dipped on Monday, erasing earlier gains from a US debt rally as stronger consumer inflation figures and robust export figures reinforced bets on an interest rate hike.
The benchmark five-year Treasury bond yield rose four basis points to 5.40 percent while the three-year Treasury bond yield was four basis points higher at 5.28 percent. "Slightly higher figures in June consumer inflation supported earlier expectations that the central bank will increase interest rates in July. Buying sentiment is unlikely to resume until the monthly interest rate meeting next week," said a Daewoo Securities dealer.
South Korean consumer prices in June rose 2.5 percent from a year earlier from a 2.3 percent rise in May, data showed on Monday, which came below expectations ahead of a central bank policy review meeting next week.
And economists say inflation will probably accelerate from July as service prices start to increase while the central bank had said last month it sees medium-long term pressure in inflation if money supply continues to grow.
"Money supply growth is a variable to the Bank of Korea's monthly interest rate meeting but it would have to ascertain the impact of its recent measures to tighten liquidity," said Goh Yoo-sun, economist at Daewoo Securities. "We see the possibility of an interest rate hike in July and August, 60 percent and 40 percent respectively."
The Bank of Korea is to hold its monthly interest rate meeting on July 12. Provisional commerce ministry data showed exports rose 15.9 percent in June from a year earlier, beating market expectations for an 11.6 percent rise. Imports grew 9.3 percent, below a 12.6 percent rise forecast in a Reuters poll.
"Stronger export growth does not have a large effect on inflation but it has confirmed expectations of an accelerating growth in the domestic economy. This also shows a growing possibility of an interest rates hike in July," Goh added.