South Korean Bond Futures Gain as Overseas Funds Buy; Won Falls

South Korea’s government bond futures gained as overseas funds bought more contracts than they sold on speculation the Federal Reserve will refrain from raising interest rates until 2015. The won fell.

Global investors were net buyers of three-year futures for a third day, exchange data show. Foreign funds bought more South Korean stocks and bonds than they sold in July after Federal Reserve Chairman Ben S. Bernanke quelled concern that a reduction of U.S. stimulus was imminent, the Financial Supervisory Service said last week. The nation’s economy is growing “moderately,” led mainly by exports, Bank of Korea said last week after keeping borrowing costs unchanged.

Three-year futures rose 0.05 to 105.72 as of 3:31 p.m. in Seoul, after reaching 105.76 earlier, the highest since July 23, exchange data show. The yield on the 2.75 percent sovereign bonds due June 2016 dropped one basis point, or 0.01 percentage point, to 2.9 percent, the lowest level since July 24, according to Korea Exchange Inc. prices.

“Foreign investors are buying bond futures, especially the short-term ones, as they believe the Fed may not raise interest rates until 2015,” said Lee Jung Bum, a fixed-income analyst at Korea Investment & Securities Co. in Seoul. “South Korea’s fundamentals are relatively reliable. It remains to be seen whether appetite for longer-term bonds returns.”

Won Declines

South Korea sold 1.8 trillion won ($1.6 billion) of five-year securities today at 3.21 percent with a bid-to-cover ratio of 4.35 times, the Ministry of Strategy and Finance said on its website. That compares with 3.04 times at the last such auction in July, which was the lowest since February 2011, Bloomberg data show. The government will offer 1.8 trillion won of 10-year notes next week.

The won fell 0.1 percent to 1,113.53 per dollar, according to data compiled by Bloomberg, halting a two-day advance. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 29 basis points to 6.57 percent.

“Importers bought dollars today as the currency snapped its gains,” said Jung Sung Yoon, a currency trader at Korea Exchange Bank in Seoul.

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