Korean Bonds Advance as Stock-Market Declines Damp Risk Appetite

South Korea’s government bonds advanced as a decline in regional equities boosted demand for the safety of sovereign debt.

The MSCI Asia Pacific Index of shares fell for a fourth day and the Kospi index of local stocks closed at the lowest level in more than a week. Federal Reserve Bank of New York President William Dudley said yesterday the pace of eventual increase in U.S. interest rates from virtually zero “will probably be relatively slow.” Treasury yields dropped yesterday as risk appetite declined a day before the Fed releases minutes of its April policy meeting.

“Some investors are adopting a wait-and-see stance ahead of the Fed’s minutes,” said Moon Hong Cheol, a Seoul-based fixed income analyst for Dongbu Securities Co. “Korean bonds are moving in line with U.S. Treasuries that were supported by risk-off sentiment yesterday.”

The yield on the 3.5 percent notes due March 2024 fell two basis points, or 0.02 percentage point, to 3.38 percent at the close in Seoul, according to Korea Exchange prices. The yield on the 3.125 percent bonds maturing March 2019 declined one basis point to 3.07 percent. The yield on 10-year Treasuries fell three basis points yesterday to 2.51 percent, according to Bloomberg Bond Trader prices.

BOK Concern

Bank of Korea Governor Lee Ju Yeol said at a meeting with economists today the won’s appreciation will burden businesses. The currency has advanced 3.7 percent this quarter, the most among 31 major exchange rates tracked by Bloomberg. Volatility may increase in the foreign-exchange market although won gains against the dollar have stabilized somewhat, the finance ministry said in a statement today.

The won closed 0.2 percent weaker at 1.026.97 per dollar, according to data compiled by Bloomberg. It fell the most in almost a week yesterday on suspected intervention to check the currency’s appreciation. Lee Seung Heon, the central bank’s team head for foreign-exchange markets, declined to say whether the authorities entered the market.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 15 basis points to 6.07 percent, data compiled by Bloomberg show.

“Short-dollar bets in the market shrank after seeing the intervention,” said Park Daebong, a Seoul-based currency trader for Nonghyup Bank. A short position is a bet an asset will decline in value.

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