BOK to buy 1 tln won in state bonds to calm market

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SEOUL, Nov. 17 (Yonhap) -- South Korea's central bank said Monday it will buy 1
trillion won (US$709.7 million) worth of government bonds from banks and other
financial institutions with no strings attached in a bid to stabilize the debt
market.
The Bank of Korea (BOK) usually buys financial institutions' bond holdings or
sells its own bond holdings to them via repurchase agreements, which require the
institutions to repurchase or resell them at a later date.
"The BOK has decided to purchase treasury bonds in a move to calm the debt market
and increase its holdings of state bonds for repurchase agreement operations,"
the bank said in a statement. An auction will be held on Wednesday.
The repurchase agreement is the central bank's main method of releasing liquidity
into the market in a credit crunch and siphoning off excess liquidity.
Last week, the country's financial watchdog said the government plans to set up a
fund of about 10 trillion won in a bid to stabilize the bond market and ease a
corporate funding squeeze.
The Financial Services Commission plans to push to create a fund into which
existing institutional bond investors, such as banks and the state pension fund,
would pool money with the aim of buying a wide range of bonds, including
corporate debt.
Following the announcement, however, South Korea's bond market was severely
rattled last week, as the creation of the envisioned fund may increase the supply
of treasury bonds in the market, prompting bond prices to tumble.
On the back of the BOK's move, bond prices, which move inversely to yields,
closed higher on Monday. The return on three-year Treasuries declined 0.17
percentage point to 5.23 percent and the benchmark yield on five-year government
bonds shed 0.2 percentage point to 5.4 percent.
sooyeon@yna.co.kr
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