South Korea 10-Year Bond Yield Drops to Record on Risk Aversion

  • Won drops to four-month low on yuan, North Korea nuclear test
  • China, geopolitical concerns add to nervousness: Citigroup

South Korea’s sovereign bonds rose, pushing the 10-year yield to a record low, as a weaker won and North Korea’s fourth nuclear test spurred demand for safer assets.

The won fell to a four-month low on speculation a weaker Chinese yuan will weigh down regional currencies. The yuan’s reference rate was cut Thursday to the lowest since March 2011. Investor sentiment toward riskier assets is unlikely to improve materially as long as concerns about China and global growth remain high, Citigroup Inc. economists including Jaechul Chang in Seoul wrote in a report. 

"There are many reasons to buy bonds, such as a weak yuan and nervousness surrounding geopolitical events on the Korean peninsula," said Seil Lee, a fixed-income analyst at Daewoo Securities Co. in Seoul, who recommends buying longer-dated notes. "The bigger concern in the market is China’s growth outlook. If the yuan continues to weaken it will have a significant impact on emerging economies."

The yield on government bonds maturing December 2025 declined two basis points to close at 2.02 percent in Seoul, Korea Exchange prices show. The yield earlier reached 2 percent, the lowest on record for a 10-year benchmark note. The three-year yield was little changed to 1.64 percent. The won retreated 0.3 percent to 1,200.40 a dollar after reaching 1,203.55, the weakest since Sept. 8, according to data compiled by Bloomberg.

North Korea

South Korea and the U.S. agreed to make North Korea pay a “price” for its nuclear test, Defense Minister Han Min Koo said at a Thursday briefing in Seoul. The United Nations Security Council pledged new measures in response to what the regime in Pyongyang claimed was its first hydrogen bomb test. Although the event adds to nervousness, previous instances haven’t usually had a lasting impact on market sentiment, according to the Citigroup report.

Following North Korea’s third nuclear test in February 2013, South Korean markets initially dipped after the news of an artificial earthquake that was later confirmed as a blast. The won ended 0.5 percent stronger on the day, while the Kospi closed 0.3 percent lower. The currency fell 0.8 percent after the latest test on Wednesday and the Kospi index of shares closed 0.3 percent lower after dropping as much as 1 percent.

The Bank of Korea stands ready to conduct smoothing operations if trading becomes volatile, Park Jun Seo, a foreign exchange official at the central bank said Wednesday, adding that risks from China’s slowdown and emerging markets remain the real issues, rather than events in North Korea.

"We don’t see any factors to stop the won’s decline in the short term," said Yuna Park, a foreign-exchange and fixed-income analyst at Dongbu Securities Co. in Seoul. "While the authorities may step in to curb the won’s steep drop around the 1,200 a dollar level, risk-aversion is very strong as traders watch the yuan amid North Korean issues."

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