Korean Bonds Rise as Investors Seek Safety Before Fed; Won Gains

South Korea’s government bonds rose, pushing the three-year yield to a one-month low, as investors sought safer assets before the Federal Reserve reviews its unprecedented stimulus. The won gained.

Overseas funds bought more South Korean three-year debt futures than they sold for a second day and dumped about $1.9 billion of stocks this month, exchange data show. The Fed will probably start reducing its $85 billion of monthly bond buying at its Dec. 17-18 policy meeting, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, up from 17 percent in a Nov. 8 poll.

“Foreign funds are buying debt futures, which is supporting the notes,” said Park Hyung Min, a fixed-income strategist at Shinhan Investment Corp. in Seoul. “Globally, funds are flowing out from emerging markets before the Fed meeting.”

The yield on the 3 percent sovereign bonds due December 2016 dropped four basis points to 2.92 percent in Seoul, Korea Exchange Inc. prices show. That’s the lowest level since the benchmark three-year yield touched 2.88 percent on Nov. 8. South Korea sold 1.7 trillion won ($1.6 billion) of 10-year government debt today at a yield of 3.66 percent, the Finance Ministry said on its website.

The political situation in North Korea is unpredictable after leader Kim Jong Un purged his uncle Jang Song Thaek earlier this month, South Korean President Park Geun Hye said at a meeting with top secretaries today, according to a statement on the Blue House website. The possibility of “reckless provocation” can’t be ruled out, she said. South Korea needs to monitor markets to contain North Korea-related risks, Finance Minister Hyun Oh Seok said in a briefing today in Sejong.

Won Outlook

The currencies of South Korea, Taiwan and Singapore will benefit from a recovery in the global market for electronics, while the exchange rates would also be influenced by the Fed’s decision, analysts at Commerzbank AG including Singapore-based Charlie Lay wrote in a Dec. 13 research note. They predict the won will fall to 1,080 versus the dollar by Dec. 31, and to 1,095 by end-2014, according to the note.

The won rose 0.1 percent to 1,051.54 per dollar after falling as much as 0.2 percent earlier, data compiled by Bloomberg show. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, climbed 11 basis points, or 0.11 percentage point, to 6.68 percent.

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