Someone Just Made a Giant Bet on Korean Sovereign Bonds

(Bloomberg) -- Someone just made a very big bet on South Korean government bonds.

Net foreign purchases of futures on the country’s three-year sovereign debt swelled to a record high of 29,147 contracts at the close of trade in Seoul, according to exchange figures. The buying binge, valued at around $2.8 billion, is the most in data going back to 2004.

Investors are confident the meeting of central bankers in Jackson Hole, Wyoming that starts Friday won’t provide a bump in bond yields, said Ryu Young-jae, fixed income division head at Samsung Asset Management in Seoul. Also “South Korea’s property-price surge seems to be stagnating, and odds the Bank of Korea will raise rates this year are falling -- all of these make the bond market bullish.”

Expectation the won will strengthen further against the dollar could also be fueling foreign demand in the futures market, Ryu said.

The extraordinary futures volume spurred some traders to speculate whether an algorithmic trader had bought the futures mistakenly.

“I don’t know why exactly foreigners bought at higher price levels, but an error may have occurred in the algorithmic program during the trade process,” says Park Sungwoo, a fixed-income analyst at NH Futures in Seoul. Even when taking the reduction in September government bond issuance and the stabilization of North Korea tensions into account, the spike is a “surprise,” he said.

An official at Korea Exchange, who asked not to be identified on policy, declined to comment. With the volume-weighted-average-price of about 109 million won, the trade of over 29,000 contracts adds up to be about $2.8 billion.  

Traders outside South Korea were also unclear on the reasons behind the purchases.

“There is speculation in the market that offshore investors are buying South Korea’s bonds, although reasons behind why now are unclear,” said Masakatsu Fukaya, an emerging-market trader at Mizuho Bank Ltd. in Tokyo. “The won seems to be being bought back by investors to square their long dollar-won positions this week as tensions on the Korean Peninsula eased.”

South Korea’s three-year government bond yields fell four basis points to 1.758 percent on Friday.

--With assistance from Hooyeon Kim and Kyung-jin Kim

To contact the reporters on this story: Narae Kim in Hong Kong at nkim132@bloomberg.net, Yumi Teso in Bangkok at yteso1@bloomberg.net, Whanwoong Choi in Seoul at wchoi70@bloomberg.net.

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Christopher Anstey at canstey@bloomberg.net, Emma O’Brien