Korea Bonds Drop on Falling Demand at Mortgage-Backed Debt Sale

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South Korea’s government bonds fell, reversing an earlier gain, after a sale of mortgage-backed debt by a state-owned company failed to meet its target.

Korea Housing Finance Corp. sold 310 billion won of the 590 billion won ($539 million) of 10-year notes it offered, the company said in a statement Thursday. The country’s sole issuer of securities backed by home loans also sold 530 billion won of 15- and 20-year debt.

“While the market expected a smooth auction, there wasn’t enough demand for the 10-year notes,” said Moon Hong Cheol, a fixed-income strategist at Dongbu Securities in Seoul. “That led to the selling of bonds as sentiment turned sour.”

The yield on sovereign notes due September 2024 rose two basis points to 2.50 percent as of the 3 p.m. close in Seoul, after falling as low as 2.45 percent earlier, Korea Exchange prices show. The three-year yield climbed one basis point, or 0.01 percentage point, to 1.89 percent. It earlier declined to 1.86 percent.

The won snapped a two-day drop and rose 0.2 percent to 1,093.94 a dollar, data compiled by Bloomberg show. The currency pared its monthly decline to 2 percent.

Korea Housing Finance plans to issue an additional 34 trillion won of mortgage-backed securities this year. The first such auction was held on May 8.

Bonds rose earlier after on speculation the central bank will cut interest rates from a record low. Policy makers need to be more active in addressing the risk of inflation falling from a 16-year low, the state-run Korea Development Institute said Wednesday in its bi-annual report.

The think tank cut its 2015 economic growth forecast to 3 percent from 3.5 percent and said expansion could be lower than its latest projection if monetary and fiscal policies aren’t supportive. The BOK, which kept its benchmark rate unchanged at record low of 1.75 percent on May 15, estimates 3.1 percent growth.

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