Korean treasury-bonds plunge

South Korean treasury bonds plunged on Friday, battered by record selling of debt futures by foreign investors fearing big rate increases and state currency controls. Foreign investors sold a net 24,117 government bond futures contracts worth 2.62 trillion won ($2.25 billion), according to the Korea Exchange, sending front-end futures into their biggest daily loss in two months to a near 11-month low.
"It was a nightmare for the debt market. A number of unfavourable things happened together, forcing foreign investors to pull the trigger mercilessly," said Jung Sung-min, a fixed-income analyst at Eugene Futures.
"It seems foreign investors are quickly pricing in the chances of big rate rises after the central bank chief hinted last night that rate increases would come in bigger steps - possibly 50 basis points each time - at the early stages of tightening," said Kim Dong-whan, a fixed-income analyst at HI Investment & Securities.
Bank of Korea Governor Lee Seong-tae told lawmakers late on Thursday that the central bank would probably raise interest rates in bigger steps than usual once increases commenced, because rates had been cut at an unusually fast pace since late last year. "Uncertainty over the rate policy has been growing, with the BOK chief surprising the market again," said Park Yu-na, an analyst at Hyundai Securities.
Fresh data also underpinned the view of a sustainable economic recovery and lingering concerns over the property market boom. Sales at the nation's top three department stores in September jumped at the fastest pace in eight months, while the nation-wide apartment prices rose for 19th straight week.
FEAR OF CURRENCY CONTROLS Foreign investors intensified their selling spree after a government official said the authorities might control foreign currency liquidity at branches of foreign banks. "If implemented, the liquidity controls will squeeze the fund pool available for foreign investors to buy more local shares and bonds," Jung at Eugene Futures said.
The yield on three-year treasury bonds soared 13 basis points to a two-month high, while the benchmark five-year bond yield jumped to a one-month high. The one-year interest rate swap also jumped to the level seen on the day before the October 9 policy meeting, which was the highest since late December 2008, as investors bet heavily on an early rate increase.