South Korean Bonds Fall on Fed Taper Speculation; Won Weakens

South Korea’s bonds fell, pushing the three-year yield to a two-week high, after U.S. economic data added to speculation the Federal Reserve will cut its stimulus sooner than investors expect. The won weakened.

The Institute for Supply Management’s gauge of manufacturing unexpectedly picked up in October, a report showed Nov. 1. Asian stocks declined after Federal Reserve Bank of Dallas President Richard Fisher said the U.S. central bank should end its stimulus as soon as possible. Global funds sold more local bond futures than they bought for a fourth day, the longest run of sales since Sept. 10, data compiled by Bloomberg show, and were net sellers of stocks today.

“The main concern is back to when the Fed is going to start tapering as U.S. economic data are better than expected,” said Kim Young Jung, a fixed-income analyst at Woori Futures Co. in Seoul. “Foreign investors have been shrinking their positions in bonds.”

The yield on the government’s 2.75 percent sovereign bonds due June 2016 climbed two basis points, or 0.02 percentage point, to 2.87 percent, the highest level since Oct. 16, according to Korea Exchange Inc. prices.

South Korea issued 1.8 trillion won ($1.7 billion) of three-year government notes at a yield of 2.87 percent today, as well as 700 billion won of 30-year bonds at 3.85 percent.

The Federal Open Market Committee maintained its $85 billion in monthly bond purchases on Oct. 30, noting the world’s largest economy is showing signs of “underlying strength.” U.S. data released Oct. 31 showed a drop in jobless claims, while a gauge of business activity jumped the most in three decades.

Tapering Odds

Economists at Citigroup Inc. and Barclays Plc said the Fed’s policy statement opens the possibility of a reduction in stimulus as soon as December. The odds of tapering in January rose to 45 percent, from 25 percent before the FOMC decision, according to Citigroup. Economists surveyed by Bloomberg Oct. 17-18 had predicted the Fed would begin paring stimulus in March.

The won fell 0.2 percent to 1,062.93 per dollar in Seoul, according to data compiled by Bloomberg. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 16 basis points to 6.02 percent.

The currency’s sharp moves can affect the real economy, and policy makers will act to curb herd behavior in the market, Finance Minister Hyun Oh Seok said in Seoul on Nov. 1. The won has strengthened 5.7 percent in the past three months, the best performance among 11 Asian currencies tracked by Bloomberg.

“We haven’t seen this kind of strong inflows into the Korean stock market in many years, and that’s driving the strengthening of the won,” Steven Chang, head of Asia currency trading at State Street Bank & Trust Co. in Hong Kong, said in an interview today. “There’s no easy way the Korean central bank can change the direction of the currency.”

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