South Korea’s Bonds, Won Drop on Fed Stimulus Tapering Concern

South Korea’s government bonds fell, pushing the three-year yield to the highest in six weeks, on concern the Federal Reserve will begin reducing stimulus next month. The won declined.

The Fed’s Open Market Committee will release minutes of its July meeting this week, possibly giving an indication of when it may cut its $85 billion of monthly bond purchases. South Korea sold 1.8 trillion won ($1.6 billion) of 10-year government notes today at a yield of 3.75 percent with a bid-to-cover ratio of 3.63 times, the lowest since January 2011.

“Foreign demand is low, especially in long-term bonds, as the Fed tapering prospects are gaining weight, whether it starts in September or later this year,” said Kim Young Jung, a fixed-income analyst at Woori Futures Co. in Seoul. “Investors will be cautious until the FOMC minutes give a clue about the exit timeline.”

The yield on the 2.75 percent sovereign bonds due June 2016 rose one basis point to 2.99 percent, the highest level since July 9, Korea Exchange Inc. prices show. The won dropped 0.2 percent to 1,115.68 per dollar in Seoul, according to data compiled by Bloomberg. It earlier touched a one-week high of 1,111.41.

“The won reversed its earlier gain on speculation importers bought dollars,” said Jahng Won, a currency trader at Shinhan Bank in Seoul. “Overall trading volume was thin.”

Won, Economy

The won will weaken to 1,150 and 1,175 against the dollar by the end of this year and by end-2014, respectively, Samsung Securities Co. economists Stephen Lee and James Huh said in an Aug. 16 research note, citing Fed-tapering concerns. The nation’s gross domestic product will grow 2.3 percent this year, according to the note, which cited a slowing economy in China, South Korea’s largest export market, as well as a property market slowdown.

Apartment transactions in Seoul plunged 80 percent in July from June, when temporary acquisition tax cuts expired, according to data on the city’s website. National home prices were little changed or fell for 14 straight months through July, according to Kookmin Bank, the nation’s largest mortgage lender.

The won’s one-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed 44 basis points, or 0.44 percentage point, to 7.27 percent.

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