Korea’s Bonds Advance Most in Six Weeks on U.S. Budget Deadlock

South Korea’s five-year bonds gained the most in six weeks as concern U.S. lawmakers will fail to agree on budget revisions spurred demand for the safety of sovereign debt.

Government securities rebounded from an earlier decline as the Kospi index of shares fell 1 percent in the biggest loss in more than a month. House Republican leaders canceled a planned vote on Speaker John Boehner’s plan to allow higher tax rates for annual income above $1 million, threatening efforts to avert more than $600 billion of tax increases and spending cuts. The won was little changed.

“Stocks plunged after reports on the U.S. vote cancellation, supporting bonds,” said Huh Kwan, a Seoul-based fixed-income trader at Korea Investment & Securities Co. “Still, bonds were facing a correction recently, and I don’t expect today’s rebound to last long.”

The yield on the 2.75 percent debt due September 2017 fell three basis points, or 0.03 percentage point, to 3.01 percent in Seoul, Korea Exchange Inc. That’s the biggest decline since Nov. 8. The rate rose to 3.05 percent earlier, and is up one basis point this week. Five-year bonds yielded 3.46 percent at the end of 2011. The one-year interest-rate swap fell one basis point today to 2.80 percent.

Bank of Korea predicted on Dec. 13 a “moderate” export- led recovery in South Korea’s economy. Data due next week is forecast to show the nation’s factory output increased 0.8 percent in November from the previous month, the fastest pace since May, according to a Bloomberg News survey.

The won closed at 1,074.35 per dollar, from 1,074.85 yesterday and 1,074.68 a week ago, according to data compiled by Bloomberg. It gained 7.3 percent this year, the best performance among Asia’s 11 most-used currencies.

One-month implied volatility, a measure of expected moves in exchange rates used to price options, slid 15 basis points to 4.75 percent today. It has fallen from 13.55 percent at the end of last year.

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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