MONEY MARKETS-Korea swaps ease after North’s attack, basis widens

By Saikat Chatterjee

HONG KONG, Nov 24 (BestGrowthStock) – South Korean swap rates
eased on Wednesday as investors bet that a flare up in
tensions in the peninsula would prompt the central bank to
keep rates unchanged in coming months.

* Traders said a rebound in Korean bond futures led by
heavy buying by a big insurance company and assurances of
prompt government action to stabilise markets soothed
sentiment and encouraged investors to look for bargains.
Korean markets had sold off on Tuesday after a deadly North
Korean artillery attack on the South. [ID:nL3E6MO04H].

* One-year swap rates fell by three basis points
(bps) to 3.08 percent while 10-year swaps eased by two bps to
4.14 percent, prompting the swap curve to steepen slightly.

* “There is a growing possibility that authorities would
neither hike interest rates nor resort to capital controls,
which is causing the receiving in swaps,” said the head of
trading at a European Bank in Seoul.

* Cross currency dollar/won swaps , which
reflect the cost of won funds for foreign investors swapping
dollar funds into won or vice versa too slipped, with the
1-year contract down by five bps to 0.90
percent due to some shipbuilder-led flows.

* That drop in cross currency swaps prompted the one-year
basis, the difference between cross-currency swaps and
interest rate swaps in won that is an approximate gauge of
yield for foreigners investing in Korean rates, to widen
slightly to -170 bps, but well above a low of -195 bps hit in
October.

* In China, one-year swaps rose to new two-year highs on
increased expectations of a rate increase before the end of
2010, with one-year contracts rising by 3 bps to 2.98 percent.
Rates have risen by 65 bps so far this month.

* A flurry of recent policy measures including two reserve
requirement increases for banks in two weeks has boosted
chances of another rate increase.

* In a sign of shrinking liquidity in the money markets,
the benchmark seven-day government bond repurchase rate
jumped another seven basis points to around 2.38
percent on Wednesday, after repeatedly rising over the past
several trading days to around six-week highs.

* In dollar funding markets, three-month dollar funding
costs in Singapore edged slightly lower to
0.29156 percent from 0.29211 percent, suggesting that
three-month LIBOR could ease at the fixing later in
the day.
(Editing by Kim Coghill)

MONEY MARKETS-Korea swaps ease after North’s attack, basis widens