South Korea's bonds volatile amid uncertainty over rates

Korean bond market has been volatile dancing to the tunes of varied hopes on interest rate changes. South Korea's sovereign bonds shed early gains as forecasts that Bank of Korea (BoK) may not reduce the interest rate from the record low of 1.5 percent.

Bank of Korea to take a decision on the interest rate on 15 October. Earlier bonds gained momentum following the expectations that US Federal Reserve might not opt for a rate hike.

Foreign investors resorted to sell 10-year bond futures while a majority of economists forecast that there would be a cut to 1.25 percent. South Korean currency Won fell 4.9 percent this year so far.

Foreign investors offloaded 10-years bond futures surpassing their buying levels and this prompts a move back in similar maturity debt. The 10-year yield fell 2.14 percent in Seoul market. The yield on notes with maturity in June 2018 moved up by two basis points to 1.66 percent.

Fixed income analysts say that there was a retreat in the bond market as foreign investors preferred to position themselves expecting that Bank of Korea to remain on holding interest rates on same level. "Central bank is likely to sound hawkish," said an analyst.

Foreign investors' net selling was to the tune of 11,065 contracts of 3-year bond futures indicating the highest level since 5 August. During the past three session, foreign investors turned net sellers on 10-year bond futures.

Analysts expect that South Korean bond yields are likely to ease further following uncertainty in Chinese economy and the US monetary policy outlook. China is South Korea's largest export market. The devaluation of Chinese currency Yuan in August, economy slowdown and financial markets turmoil are taking a toll on the South Korea's markets.

The South Korean currency Won rose 0.2 percent to 1,147.05 against the US dollar, according to Bloomberg data. Won dropped by 4.9 percent this year so far. Kospi index was also dropped for second consecutive session after the fall in imports by China.

Recently foreign investors offloaded won4.9trillion ($4.14bn) from South Korean stocks and bonds in July marking the major selloff since August 2011, in which the sold Won5.8tn. The pending US rate cut has been forcing foreign investors to shy away from riskier assets.

However, the Korean government is optimistic about the consumer spending. South Korean Finance Minister Choi Kyung Hwan said that country's consumer spending was improving in the wake of festive shopping campaign 'Korea Black Friday' is expected to drive the demand in the domestic market.

The Bank of Korea lowered forecast on economic growth to 2.8 percent from 3.1 percent in July. BoK is also scheduled to review the economy and its outlook. The jobless rate dropped to 3.5 percent in September from 3.6 percent in August.