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South Korean Bonds Gain as Slump in Treasuries Bolsters Demand

South Korea’s government bonds rose, pushing the five-year yield to a seven-week low, as speculation a slump in U.S. Treasuries increased demand for emerging-market assets.

Treasuries had their worst start to a year since 2009 after the Federal Reserve indicated, according to minutes of last month’s meeting released Jan. 3, that it may end its $85 billion monthly bond purchases sometime in 2013. U.S. government securities handed investors a 0.7 percent loss in 2013 as of yesterday, Bank of America Merrill Lynch indexes show. Bank of Korea Governor Kim Choong Soo said last week the central bank will seek other ways to spur economic growth than using monetary policy.

“Investors are closely tracking the yield moves in the world’s largest economy,” said D.J. Park, fixed-income analyst at Samsung Futures Inc. in Seoul. “Still, movement in the yield in Korean bonds is likely to be limited as investors await the central bank’s interest-rate decision this week.”

The yield on South Korea’s 2.75 percent bonds due September 2017 fell four basis points, or 0.04 percentage point, to 2.87 percent, according to Korea Exchange prices. That matched the level for the benchmark five-year yield on Nov. 20 and Nov. 21.

Bank of Korea policy makers meet on Jan. 11 to decide on borrowing costs. All 10 economists surveyed by Bloomberg News forecast the benchmark interest rate will remain at 2.75 percent, while seven of 16 economists in a separate survey see a 25 basis point reduction by March.

The central bank kept the seven-day repurchase rate at 2.75 percent last month, after cuts of 25 basis points at reviews in July and October.

Currency Market

The won rose 0.1 percent to close at 1,062.90 per dollar at 3 p.m. in Seoul, reversing a two-day decline, according to data compiled by Bloomberg. It touched 1,060.50 yesterday, the strongest level since Aug. 4, 2011, before closing at 1,063.76 on speculation authorities took action to slow the won’s appreciation.

Finance Minister Bahk Jae Wan said last week he was concerned about herd behavior in the foreign-exchange market and the government was actively considering measures to curb volatility in the won, which was Asia’s best-performing currency last year, with an 8.3 percent advance versus the dollar.

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