South Korean government bond prices shaved off earlier gains to end steady on Monday as Seoul shares hit another record, although losses were limited as bond prices still looked attractive to some investors.
The benchmark Korea Composite Stock Price Index's (KOSPI) 1.95 percent rise to a record close helped erase bonds' earlier gains on a tame reading of US core inflation, and offset bargain hunting after the benchmark treasury bond yield hit a 17-month high last week. The yield on the five-year treasury bond was unchanged at 5.36 percent, while the three-year treasury bond yield fell one basis point to 5.24 percent.
"Higher domestic share prices mean increasing liquidity in the markets, which is a sore spot - the central bank had warned that would be the main reason to raise interest rates in the near future," said a dealer at Daewoo Securities.
Bank of Korea Governor Lee Seong-tae said after holding interest rates steady for the 10th consecutive session earlier this month that increasing risks from overflowing liquidity may threaten to accelerate inflation in the medium to long run.
Speculation that the Bank of Korea will raise interest rates in the third quarter to pre-empt inflationary pressures on Asia's fourth-largest economy had lifted the five-year bond yield up to 5.39 percent on June 12, the highest since January 10, 2006.
The Finance Ministry said on Monday that South Korea's economy is entering a recovery phase but is still facing risks such as firmer oil prices and the possibility that China will take additional steps to cool its economy. On the supply front, the Finance Ministry sold all 797 billion won ($859.1 million) worth of 10-year treasury bonds at a yield of 5.49 percent. June treasury bond futures rose 3 ticks to 107.37.
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