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S. Korea's risk premium hits 19-month high on NK woes

South Korea's credit default risk has reached a 19-month high on escalating tensions over North Korea's weapons programs, market sources said Wednesday.

The credit default swap premium for South Korean foreign exchange stabilization bonds with a five-year maturity came to 74.09 basis points Tuesday, the highest since the 78.86 basis points recorded Feb. 11, 2016.

The risk premium also marked a five-session streak of gains and was up 8.69 basis points from five days earlier.

The spread reflects the cost of hedging credit risks on corporate or sovereign debt. A rise implies a deterioration in the credit of government bonds and higher costs for issuance. A basis point is 0.01 percentage point.

The surge comes as the United States and North Korea have been locked in a bitter war of words over Pyongyang's nuclear and missile programs since the recent UN General Assembly in New York.

In his latest salvo, US President Donald Trump said Tuesday he is "totally prepared" to use military options in North Korea, although they are not preferred.

His remark came in response to Pyongyang's threat a day earlier to shoot down any approaching American bombers, even if they are in international air space. US warplanes flew close to North Korea's east coast Saturday in a show of force.

Defying international sanctions, the North conducted its sixth and most powerful nuclear test early this month and has launched two ballistic missiles over northern Japan in recent weeks, stoking tensions on the Korean Peninsula.

The CDS premium rose five sessions running from Aug. 8-14 on heightened tensions on the peninsula arising from a previous showdown between Washington and Pyongyang.

Market analysts said the so-called North Korea risk has made foreign investors increasingly wary of South Korean securities. "Foreigners sold 2 trillion won ($1.76 billion) worth of bonds on the spot market Tuesday, and they may take a risk-averse approach toward won-denominated bonds on both spot and futures markets before the start of a long holiday," said Lee Seul-bi, an analyst at Samsung Securities Co.

The 10-day Chuseok holiday begins later this week. The Korean autumn harvest celebration is similar to Thanksgiving in the US, with people spending time together with family and friends. (Yonhap)