As the twin crises in the U.S. and Europe send global equity markets plunging, investors are seeking safer destinations, particularly bonds, in South Korea.

The Bank of Korea said in a report on Tuesday that the yield on three-year Treasury bonds saw a drop of 30 basis points between Aug. 2-8 as investors bid prices up. The rush came as the Korean stock market took a battering along with other Asian markets.

“Foreign investors have been a net buyer on the bond market in the past sessions, encouraged by Korea’s solid economic fundamentals despite the current crisis,” the central bank said.

The yield for the three-year Treasury bond stood at 3.90 percent on Aug. 1 before falling steadily to 3.60 percent on Monday. Foreign bond investors net bought 1.9 trillion won worth of bonds on the futures market on Friday and 1.4 trillion won on Monday, according to the BOK.

Analysts said the upward trend in the country’s bond market is likely to continue for a while, though other factors such as spreading fears that the U.S. might stumble into a recession could put a new spin on the ongoing “flight to quality” move.

“Bond yields should keep falling in the second week of August,” said Na Jung-Oh, analyst at Korea Investment & Securities Co. “Safe haven assets will remain in high demand globally.”

Dongbu Securities’ analyst Shin Dong-jun agreed: “The environment is increasingly becoming favorable to bond markets.”

The consensus, as illustrated by Wall Street’s performance on Monday, is that U.S. Treasury bonds are still the most liquid market in the world, and there are few alternatives when it comes to the safe heaven assets. Likewise, bond investors on the Korean market also cast a positive perspective on the outlook.

Korea’s bond market rally, however, is seen as limited as the gap between the Korean government bonds and its policy rate has sharply narrowed. The BOK kept its key interest rate unchanged last month, at 3.25 percent, and is scheduled to hold the policy-setting meeting on Thursday.

Another key factor to watch is how the U.S. and European nations come up with convincing measures to contain the fallout and restore confidence among investors, analysts said.

“The biggest variable for the bond market will be whether advanced nations find a lasting solution to the current crisis,” said Daewoo Securities in a report on Tuesday.

By Yang Sung-jin (insight@heraldcorp.com)