SEOUL: South Korean bonds fell sharply on Thursday after the central bank left the policy rate unchanged, contrary to market expectations of a cut to re-ignite growth.
September futures on three-year treasury bonds dropped 0.22 points to 105.93 after falling as low as 105.74 in intraday trade. Foreigners' net selling of the futures contract was the highest since Aug. 16, reflecting profit-taking pressures.
Yields on the benchmark five-year treasury bonds and three-year treasury bonds also rose seven basis points each from Wednesday's close.
The Bank of Korea held the benchmark seven-day repurchase agreement rate at 3.00 percent, signalling it would assess the impact of a recent small domestic fiscal boost and Europe's efforts to fight its debt crisis.
All but three of 21 analysts surveyed by Reuters had predicted a 25 basis-point cut and bond prices had risen in anticipation of such a cut as well as further easing to bring the policy rate to 2.50 by the year-end.
A fresh poll of 12 analysts on Thursday showed that 11 of them still expect the central bank to deliver a rate cut in October, when the central bank is expected to cut its 2012 growth forecast from 3.0 percent.
"There is policy coordination between the central bank and the government to prepare for the possibility that growth won't pick up next year, so the central bank will save its cards," a debt dealer said.
Meanwhile, the South Korean won edged down, snapping a five-day winning streak amid strong dollar demand from local firms.
The local currency was quoted at 1,128.4 against the dollar at the end of domestic trade on Thursday, compared with 1,126.4 at the end of onshore trade Wednesday.
"There were some offshore dollar buyers after lunch, and it appears that there was some hedging demand," a foreign bank dealer said.
The benchmark Korea Composite Stock Price Index ended up 0.66 points at 1950.69. Foreigners were net buyers of 128.0 billion won ($113.63 million) worth of local shares on Thursday.
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