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Korea Bonds Fall on U.S. Budget Optimism; Won Reverses Gains

South Korea’s bonds fell, pushing the five-year yield to a four-month high, on signs U.S. lawmakers are closer to resolving a budget impasse. The won retreated from a 15-month high on suspected intervention.

U.S. stocks rallied yesterday as two people familiar with the talks said President Barack Obama is considering budget concessions after House Speaker John Boehner dropped opposition to raising tax rates for top earners. Without an agreement, more than $600 billion in spending cuts and tax increases will take effect in January. South Korea’s National Pension Service plans to boost investment in local equities by 22.5 percent from September 2012 to December 2013, compared with a 1.8 percent increase in local debt, it said in a statement yesterday.

“Investors had overreacted to the U.S. budget issue and bonds are weakening as a resolution looks likely,” said Kong Dong Rak, a Seoul-based bond analyst at Hanwha Investment & Securities Co. “‘With the NPS increasing bond investment by only a small amount next year, there are concerns that bonds may face a further correction.”

The yield on South Korea’s 2.75 percent notes due September 2017 increased four basis points, or 0.04 percentage point, to 3.05 percent at the close in Seoul, Korea Exchange Inc. prices show. That’s the highest rate for a benchmark five-year security since Aug. 20. The yield has dropped 41 basis points this year. The one-year interest-rate swap was steady at 2.82 percent.

Election Tomorrow

The won fell 0.1 percent to 1,073.23 per dollar at the close, after gaining as much as 0.2 percent earlier, according to data compiled by Bloomberg. The currency touched 1,070.73, the strongest level since Sept. 8, 2011.

“It seems the government tried to prevent the won from strengthening beyond the 1,070 per dollar level,” said Jude Noh, chief currency trader at Suhyup bank in Seoul.

South Koreans vote tomorrow to replace President Lee Myung Bak, whose five-year term ends in February. Support for Park Geun Hye from the ruling party stood at 48 percent, 0.5 percentage point ahead of opposition candidate Moon Jae In, according to a Dec. 12 poll by the Seoul-based Realmeter and JTBC, a cable television affiliate of the JoongAng Ilbo newspaper. Local financial markets are closed tomorrow.

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