South Korean Bonds Extend Biggest Weekly Slump as Demand Falls

South Korean government bonds fell, following the biggest weekly decline in at least 12 years, after demand waned at a treasury debt auction today.

The Finance Ministry sold 700 billion won ($602 million) of 20-year sovereign notes today with a bid-to-cover ratio of 2.116 times, the lowest since Bloomberg began compiling the data in July 2010.

Investors demanded a yield of 3.824 percent, compared with 3.100 percent at the previous auction on May 27. U.S. Treasury yields climbed to the highest since 2011 after Federal Reserve Chairman Ben S. Bernanke said June 19 that the central bank may taper its $85 billion monthly bond purchases this year if the U.S. economy performs in line with its projections.

“South Korean bonds, especially long-term notes, have been weak since Bernanke’s comments,” said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul. “Local market volatility will continue until U.S. bond yields return to a normal level as investors are still cautious about the U.S. economy.”

Won-denominated sovereign notes lost 1.6 percent last week, according to an index compiled by HSBC Holdings Plc, the most since the index’s inception in December 2000.

Rising Yields

The yield on the 3 percent government bonds due March 2023 rose 16 basis points to 3.69 percent today, prices from Korea Exchange Inc. show. It climbed 33 basis points last week, the biggest gain since May 8, 2009. The yield on the five-year government bonds added 16 basis points to 3.42 percent today.

More than $6.9 billion left funds investing in developing nation debt in the four weeks to June 19, the most since 2011, according to Morgan Stanley, which cited EPFR Global data.

Financial market volatility caused by concerns about an unwinding of U.S. quantitative easing is likely to affect bond markets and corporate funding, South Korean Financial Services Chairman Shin Je Yoon said at a meeting today, according to an e-mailed statement.

South Korea sold less than a 10th of the 600 billion won it targeted from 10-year inflation-linked bonds on June 20, according to the Finance Ministry’s website.