SEOUL-- South Korea plans to buy back 2 trillion won (US$1.7 billion) worth of government bonds in a bid to tackle a sharp hike in bond yields, a senior government official said Tuesday, with yields on Treasurys sharply dropping.

Second Vice Finance Minister Ahn Do-geol said the government will actively seek policy coordination with the Bank of Korea (BOK), when needed, to stabilize the bond market.

"The stable management of the government bond market has become more important than at any time to support the fiscal policy's role and the smooth adjustment of the (accommodative) monetary policy," Ahn said at a meeting with senior officials at investment banks and market experts.

The yield of three-year government bonds topped 2 percent for the first time in three years last week amid global inflation risks and talks of tapering stimulus measures.

The return on three-year state bonds added 0.5 basis point to 2.108 percent Monday, the highest since August 2018. Bond prices move inversely to yields.

The buyback plan sent the yield on three-year Treasurys shedding 7 basis points to close at 2.038 percent, marking the sharpest on-day fall this year. The return on five-year government bonds also dropped 7.5 basis points to 2.301 percent.

The finance ministry said Thursday it plans to sharply scale down its sale of state bonds, mostly those with short-term maturities, for November in a bid to ease market volatility.

The government plans to sell 8 trillion won worth of government bonds this month, down from the 10.4 trillion won issued for October.

The BOK also said it will reduce the sale of monetary stabilization bonds in November to help ease market volatility.

Market experts said volatility in the bond market could increase amid the growing anticipation for the Federal Reserve's tapering of asset purchases and the BOK's rate hike.

The Fed is widely expected to start to taper its bond purchases in November as the U.S. economy is recovering from the pandemic. The Fed's policy meeting is slated for Tuesday and Wednesday (local time).

The BOK is also forecast to raise its key interest rate at its rate-setting meeting on Nov. 25 to curb inflation and household debt.

South Korea's central bank froze the benchmark rate at 0.75 percent last month after raising it from a record low of 0.5 percent in August.

Source: Yonhap News Agency