October Bond Market Outlook: Range-Bound Fluctuations Amid Conflicting Upward and Downward Factors

The bond market in October is expected to continue fluctuating within a range, as both upward and downward factors are in conflict. In the case of Korean Treasury bonds, diminished expectations for a Bank of Korea rate cut are a burden. However, the upcoming inclusion in the World Government Bond Index (WGBI) serves as a major event that is likely to limit upward pressure on yields.

According to Kiwoom Securities on October 6, the bond market is expected to be slightly bearish this month. The weak sentiment seen at the end of September is expected to persist due to reduced expectations for rate cuts by both the US Federal Reserve and the Bank of Korea. However, since expectations for rate cuts remain valid in both countries, upward and downward factors are seen to be in conflict.

First, in the Treasury bond market, it was analyzed that the situation at the end of September, when the three-year yield exceeded 2.5%, was excessive, even considering the reduced expectations for a rate cut.

Kiwoom Securities researcher Ahn Yeha stated, "The Treasury bond market is expected to face downward pressure due to uncertainty surrounding a possible rate cut by the Bank of Korea in October. Based on recent statements, the likelihood of a rate cut in October appears to have been greatly reduced," she said. She added, "If the Bank of Korea has not shifted to a full-year hold, the recent rise in yields was largely driven by supply-demand factors such as foreign investors selling futures." She continued, "Although concerns about next year's fiscal situation remain, after the announcement of WGBI inclusion, the selling sentiment triggered by supply-demand worries is expected to stabilize somewhat."

The expectation that foreign demand for Korean Treasury bonds will increase in the mid- to long-term due to WGBI inclusion is also seen as a factor supporting long-term bond purchases. She analyzed, "Despite the increased burden of government bond issuance in the second half of this year, the limited widening of the yield curve between short- and long-term bonds likely reflects expectations for funds related to the upcoming WGBI inclusion." She further predicted that, with WGBI inclusion, foreigners' holdings will increase mainly in the mid- to long-term sector, helping to absorb the supply of long-term bonds.

Ahn explained, "While the completion of rate cuts and expansionary fiscal policy may lead to curve steepening, if expectations for rate cuts remain open through the first half of next year, the inflow of foreign capital due to WGBI inclusion will occur simultaneously, and the degree of steepening may not be significant."

She also noted that the US Treasury market is expected to face intermittent downward pressure. Although the Federal Reserve's dot plot suggests rate cuts at both the October and December Federal Open Market Committee (FOMC) meetings, the diminishing expectations for additional rate cuts going forward are seen as a burden.

Ahn commented, "Employment and inflation indicators will serve as factors supporting additional rate cut expectations and will limit the upper bound of yields. However, the reduction in rate cut expectations will also limit downward pressure on yields," she said, describing it as a "conflict between upward and downward factors for bond yields."