South Korea's government bond yields hit the record low as expectations for policy rate cut emerged among market participants, central bank data showed Wednesday.

Yields on the liquid three-year Korea Treasury Bond (KTB) closed at 2.61 percent on Tuesday, the lowest in the country's history, according to the Bank of Korea (BOK).

The yield continued to fall to 2.63 percent as of the end of February from 2.76 percent a month before, staying below the benchmark seven-day repurchase rate of 2.75 percent. The BOK kept the rate on hold at 2.75 percent for four straight months in February.

Foreign funds raised their holdings of local bonds on expectations that the central bank would lower the policy rate further after the new administration under President Park Geun-hye took office on February 25.

BOK Governor Kim Choong-soo said in a February 21 forum that the bank "should bear in mind the need to take proper action for growth recovery," reiterating his earlier stance that monetary policy should seek a harmony with fiscal policy to maximize the effect of policy mix.

Growing views over the South Korean currency's ascent against the U.S. dollar won also boosted foreign demand. Foreign holdings of local bonds increased 3.5 trillion won ($3.2 billion) in February.

"Investors are likely to stay cautious until the March monetary policy meeting," said Yoon Yeo-sam, a senior fixed- income strategist at KDB Daewoo Securities in Seoul. "However, in light of stable macro conditions, yields will likely increasingly face upward pressures."