South Korean bonds rallied Thursday after the U.S. Federal Reserve indicated a suspension of rate increases for this year while other markets were mixed as they were more focused on weakening in the U.S. economy and greater value in safer dollar assets.

Bond prices rose sharply, betting on a possible rate cut in Korea as the hold-up in U.S. tightening could give more maneuvering room for the Korean central bank combating a worsening economy and inflation under 1 percent even as the Bank of Korea governor struck out the option.

The yield on the three-year government bond finished Thursday at 1.793 percent, down 2.0 basis points from the previous closing. The gains were sharper in longer-dated papers (The yield moves in the opposite direction of the price). The five-year government bond yield was 1.829 percent, down 3.7 basis points, while the 10-year note fell 4.9 basis points to 1.932 percent and the 20-year 6.1 basis points to 1.947 percent.

The benchmark Kospi, which started off 1 percent higher upon the overnight FOMC news, flip-flopped around the positive and negative territory. It closed Thursday up 0.36 percent at 2,184.88. The Kosdaq fell 0.83 percent to 743.52.

The Korean won strengthened against the U.S. dollar, gaining 0.24 percent to 1,127.7.

The Fed on Wednesday (local time) held its benchmark fund rates steady in a range of 2.25 percent to 2.5 percent, giving a more downbeat assessment of the economy. It expected the U.S. economy to grow 2.1 percent this year, down from the 2.3 percent forecast in December.

Jerome Powell, the Fed chairman, said “growth is slowing somewhat more than expected” amid the ongoing trade war with China and signs of economic slowdown in China and Europe. The Fed also cited mild inflation pressures, with last year’s inflation falling below its 2 percent estimate, as another reason to hold rates.

The Fed also announced it would slow the pace of tightening and end the runoff of its Treasury holdings at the end of September, another sign that the Fed has turned super-dovish, market analysts said.

In response to the Fed’s turnabout, BOK governor Lee Ju-yeol told reporters Thursday the Fed decision was “more accommodative than expected” and gave more “maneuvering room” for the Korean bank. He added, however, that it was too early to consider a rate cut.

The Bank of Korea raised the interest rate only twice over the last two years during the period when the U.S. rates went up from zero percent range to 2.50 percent. In February, it kept the policy rate unchanged at 1.75 percent.

By Kim Hyo-jin

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]