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Korean Bonds Gain on Government Support Optimism; Won Advances

South Korea’s three-year bonds gained for a third day and the won reversed earlier losses on optimism policy makers are prepared to buy the securities amid tensions with North Korea.

The yield fell to its lowest level in almost a week as the government said it will increase diplomatic efforts to secure help from China, North Korea’s closest ally, following a deadly exchange of artillery fire. The finance ministry said yesterday “ample” liquidity will be supplied in local and foreign currencies to shield markets from any shocks after North’s attack on one of the country’s islands two days ago.

Policy makers “have a strong view to stabilize the market, especially the bond market,” said Peter Park, a fixed-income analyst for Woori Investment & Securities in Seoul. “The appreciation of the won also helped the bond market.”

The yield on the 3.75 percent notes maturing in June 2013 dropped four basis points to 3.31 percent, according to the Korea Stock Exchange.

The won reversed earlier losses as the benchmark Kospi stock index gained after two days of losses.

“The stock market is stable,” said Sam Hong, a currency dealer at Shinhan Bank in Seoul. The “shock” over the incident with the North has faded, he said.

The won advanced 0.4 percent to 1,137.65 per dollar at the close in Seoul, after declining as much as 0.7 percent today, according to data compiled by Bloomberg. The currency has weakened 2.1 percent in the past month.

President Barack Obama talked with South Korean counterpart Lee Myung Bak by phone and dispatched the USS George Washington from Japan yesterday to take part in military drills.

The North’s shelling of Yeonpyeong island was the first such attack on South Korean soil since the Korean War. Two soldiers and two civilians were killed.

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