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South Korean Bonds Decline as Ukraine Tension Eases; Won Steady

South Korea’s government bonds fell, sending the three-year yield to a one-month high, as reduced concern about conflict in Ukraine supported demand for riskier assets.

The Kospi index of shares closed at the highest level in two weeks as officials from Ukraine, Russia and other countries met to discuss a truce in separatist-held territory in eastern Ukraine. Bonds also fell as expectations for an additional rate cut by the Bank of Korea weakened. The monetary authority said in a statement after lowering the benchmark rate to 2.25 percent on Aug. 14 that it will closely monitor the cut’s impact on the economy for future policy decisions.

“Geopolitical risks surrounding Ukraine have receded, weakening bonds,” said Kim Young Jung, a Seoul-based fixed-income analyst at Woori Futures Co. “There is also a consensus that another cut by the BOK is unlikely, which is making some investors take profit from recent gains.”

The yield on the 2.75 percent government bonds due June 2017 rose two basis points, or 0.02 percentage point, to 2.58 percent at the close in Seoul, Korea Exchange Inc. prices show. That’s the highest level since July 16. The yield reached 2.47 percent on July 23, the lowest for a benchmark three-year government note since May 2013.

The finance ministry sold 34 billion won ($33 million) of inflation-linked bonds at a monthly auction yesterday, the least since November, according to a statement today on the government’s website.

Debt Sales

After the rate cut, the focus will now turn to the 2015 budget, Albert Leung, a Hong Kong-based strategist at Bank of America Merrill Lynch, wrote in a research note yesterday. The finance ministry said July 24 that next year’s government spending will be “as expansionary as possible.” Sovereign debt issuance will be around 110 trillion won from this year’s planned 97.5 trillion won, Leung wrote, citing market estimates.

The won closed little changed at 1,017.40 per dollar, according to data compiled by Bloomberg, after allying 2 percent last week. One-month implied volatility, a gauge of expected swings in the exchange rate used to price options, dropped 13 basis points to 5.78 percent.

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