Korea Bond Yield Rises to 2-Month High on Fed Concern; Won Drops

South Korea’s bonds fell, pushing the three-year yield to the highest level in more than two months, after minutes of the Federal Reserve’s meeting indicated stimulus may be cut “in coming months.” The won weakened.

The U.S. central bank’s $85 billion of monthly bond purchases might be reduced as the world’s largest economy improves, minutes of the policy-setting Federal Open Market Committee’s Oct. 29-30 meeting showed yesterday. South Korea’s department store sales dropped 2.2 percent last month from a year earlier, the Trade Ministry reported today. The won declined for a second day as overseas investors sold $222 million more local stocks than they bought, exchange data show.

The yield on the 2.75 percent sovereign bonds due June 2016 climbed four basis points, or 0.04 percentage point, to 2.99 percent in Seoul, according to Korea Exchange Inc. prices. That’s the highest level since Sept. 6.

“The Fed minutes showed that officials think the U.S. economy is growing in line with its projections,” Park Dongjin, a fixed-income analyst at Samsung Futures Inc. in Seoul, wrote in a research note today. It remains to be seen how Janet Yellen, nominee to replace Ben S. Bernanke as Fed Chairman, will “work on the stimulus exit strategy with hawkish officials,” he said.

Yellen said last week that the U.S. economy and job market are performing “far short of their potential,” and the Fed will ensure measures aren’t removed too soon. New York Fed President William C. Dudley said this week that while he’s becoming “more hopeful” the economy is rebounding, monetary policy will remain accommodative for a period of time.

Four of five investors expect the Fed to delay a decision to begin reducing its bond buying until March 2014 or later, with just 5 percent looking for a move next month, according to the latest Bloomberg Global Poll.

Household Debt

South Korea’s household debt rose to record 991.7 trillion won ($932.9 billion) at end-September from three months earlier, the Bank of Korea said in a statement today.

Asia’s fourth-largest economy faces challenges to its decades-long growth model based on manufacturing due to the rise of China and other emerging industrial economies, and as the country’s major industries reach full maturity, Finance Minister Hyun Oh Seok said today in a speech prepared for a forum in Seoul, delivered by vice finance minister Choo Kyung Ho.

The won fell 0.5 percent to 1,062.97 per dollar in Seoul, according to data compiled by Bloomberg. One-month implied volatility in the won, a measure of expected moves in the exchange rate used to price options, rose 23 basis points to 6.24 percent.

The won gained 2 percent against the Japanese yen this month, data compiled by Bloomberg show. South Korea’s currency will find it hard to rise given concerns within the Bank of Korea about its strength as the yen has weakened past 100 per dollar, Credit Agricole CIB strategist Dariusz Kowalczyk, wrote in a research note yesterday.

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