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South Korean Bonds Advance on Signs Europe Is Slowing; Won Gains

South Korea’s government bonds advanced after data indicated an economic slump is deepening in Europe. The won traded near a two-month high.

Services and manufacturing output shrank in June for a fifth month in the euro area and services unexpectedly contracted in Germany, reports showed yesterday. The European Central Bank will cut its benchmark rate by at least a quarter of a percentage point today, according to 52 of 63 economists in a Bloomberg survey. South Korea will focus policy efforts on stabilizing prices and sustaining growth as it continues to face headwinds from Europe and a slowdown in the U.S., the Finance Ministry said in an e-mailed statement today.

“Demand for bonds was supported by weak data from Europe, and there seems to be plenty of money in the market with investors yet reluctant to opt for riskier assets,” said Huh Kwan, a Seoul-based fixed-income trader for Korea Investment & Securities Co.

The yield on the government’s 3.5 percent bonds due March 2017 slipped two basis points, or 0.02 percentage point, to 3.37 percent, Korea Exchange Inc. prices show. Three-year debt futures advanced 0.02 to 104.81 and the one-year interest-rate swap climbed one basis point to 3.36 percent.

The Kospi Index (KOSPI) of shares closed at a two-week high as overseas funds bought $174.6 million more of the nation’s shares than they sold this week through yesterday, exchange data shows.

The won advanced 0.1 percent to 1,135.15 per dollar at the close in Seoul, according to data compiled by Bloomberg. It touched 1,132.79 yesterday, the strongest since May 4. The currency’s one-month implied volatility, a measure of exchange- rate swings used to price options, increased 10 basis points, or 0.10 percentage point, to 7.28 percent.

“Currency movements weren’t big today with the ECB meeting coming up, and the won gained in the afternoon on speculation overseas investors are selling the dollar to buy Korean stocks and bonds,” said Han Sung Min, a Seoul-based currency trader at Busan Bank.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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