Korea Bonds Advance Before Global Manufacturing Data

South Korea’s won weakened the most in more than two months and government bonds advanced as data from Japan and China heightened concern the global economic slowdown is worsening.

A preliminary reading for a Chinese manufacturing survey pointed to an 11th month of contraction and Japanese exports fell in August for a third month, reports released today showed. The Kospi (KOSPI) index of shares fell the most in two weeks as most currencies in Asia weakened against the dollar. South Korean consumer inflation may ease to less than 2.7 percent this year, Bank of Korea board member Lim Seung Tae said today, reiterating a projection made by the central bank in July.

“With shares and other currencies falling on economic concerns, we saw a lot of overseas investors covering their short positions on the dollar,” said Lee Jin Ill, a Seoul-based currency trader at Hana Bank. “Reports on tensions between China and Japan also contributed to worsening sentiment on the won, but I don’t expect this correction to last for long.” A short position is a bet an asset will decline in value.

The won dropped 0.8 percent to 1,123.15 per dollar at the close in Seoul, the biggest decline since July 12, according to data compiled by Bloomberg. The currency touched 1,114.65 yesterday, near a six-month high. One-month implied volatility, a measure of exchange-rate swings used to price options, rose 15 basis points to 6.25 percent.

China should make all possible preparations in regard to its territorial dispute with Japan over islands in the East China Sea, including for military conflict and “even war,” Wang Xiaoxuan, director of the Naval Research Institute of the People’s Liberation Army, wrote in the China Daily today.

Bond Losses Reversed

The yield on the government’s 3.25 percent bonds due June 2015 fell five basis points to 2.83 percent, the lowest level since Sept. 12, Korea Exchange Inc. prices show. The yield rose 11 basis points this month through yesterday. The one-year interest-rate swap fell four basis points, or 0.04 percentage point, to 2.89 percent.

“With monthly economy data due in the coming weeks and expectations for a rate-cut next month rising as the slowdown deepens, the recent losses in bonds are being reversed,” said Lee Gil Won, a Seoul-based bond trader for Shinhan Bank.

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

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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