Yield on Korean bonds is lowest since Jan. 2011

Korea’s government bonds fell, pushing the three-year yield to the highest in six weeks on concerns 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.

Korea sold 1.8 trillion won ($1.6 billion) of 10-year government notes yesterday 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. “Investors will be cautious until the FOMC minutes give a clue.”

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 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 Jang Won, a currency trader at Shinhan Bank in Seoul. “Overall trading volume was thin.”

The won will weaken to 1,150 and 1,175 against the dollar by the end of this year and by the end of 2014, respectively, Samsung Securities economists Stephen Lee and James Huh said in a recent 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, 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 Web site. National home prices were little changed or fell for 14 straight months through July, according to Kookmin Bank.

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.

Bloomberg