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Korea Bonds Drop on Bets Authorities Looking to Curb Won Advance

South Korea’s government bonds fell, pushing yields up from the lowest in six months, after the authorities signaled they are ready to curb the won’s gains.

South Korea will “sternly respond” to speculative moves resulting in herd behavior in the foreign-exchange market, Finance Ministry Director General Choi Hee Nam said in a text message to reporters on May 9. The Bank of Korea left the benchmark interest rate at 2.5 percent at its May 9 policy meeting. Governor Lee Ju Yeol said in a briefing after the review that the sinking of a ferry that left 275 people dead and 29 missing will affect consumption this quarter.

The yield on the 3.125 percent March 2019 bonds rose one basis point to close at 3.12 percent in Seoul, according to Korea Exchange data. It reached 3.11 percent on May 9, the lowest for a benchmark five-year security since November.

“Some investors were betting on stronger bonds last week expecting a less hawkish central bank meeting, and it seems they took profit,” said Park Dongjin, a Seoul-based fixed-income analyst at Samsung Futures Inc. “Investors buying Korean debt betting on a stronger won might have sold assets after the authorities’ verbal intervention.”

The yield on 10-year sovereign notes climbed one basis point to 3.44 percent. Overseas investors sold 2,013 more contracts of 10-year bond futures than they bought today, the heaviest net selling since March 6, according to exchange data.

South Korea is considering measures to reduce its current-account surplus, which is driving the won’s appreciation, Kim Seong Wook, a director at the finance ministry, said by phone today. The won climbed to the strongest level in more than 5 1/2 years last week, prompting authorities to warn against herd behavior.

Won, Volatility

The won closed at 1,024.50 per dollar in Seoul after weakening as much as 0.2 percent, from 1,024.45 last weak, according to data compiled by Bloomberg. It touched 1,020.97 on May 9, the strongest level since August 2008. The currency has appreciated 3.9 percent this quarter, the most among 31 major exchange rates tracked by Bloomberg.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, advanced 18 basis points, or 0.18 percentage point, to 6.09 percent

“The authorities showed strong willingness to prevent one-sided bets on the won, and this will prevent the currency from rising above 1,020 per dollar,” said Son Eun Jeong, a Seoul-based currency analyst for Woori Futures Co. “Still, we’re seeing exporters waiting to sell dollars whenever the won weakens, and this will limit losses.”

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