Hana Financial Research Institute, "Increased Preference for Safe Assets Due to Wuhan Pneumonia... International Interest Rates Decline"

Source: Screenshot from Hana Financial Management Research Institute report

[Asia Economy Reporter Kim Min-young] As the novel coronavirus infection (Wuhan pneumonia) rapidly spreads, a global preference for safe assets has increased. Consequently, international interest rates have fallen.

On the 3rd, Kim Su-jeong, Senior Researcher at Hana Financial Management Research Institute, stated in the report titled 'Interest Rates: Predominant Downward Pressure Due to Economic Uncertainty from China' that "interest rates are declining as global safe asset preference is highlighted amid the spread of the novel coronavirus."

According to the report, global investment sentiment sharply cooled due to the spread of the novel coronavirus. In particular, since one of the recent reasons for risk asset preference was the expectation of economic improvement in China and emerging markets, the market adjustment range has expanded.

Senior Researcher Kim noted that in the case of the current novel coronavirus spread, the high domestic consumption ratio in China, its contribution to the global economy, and the fragile momentum for global economic growth are intertwined, potentially causing a greater shock than during the Severe Acute Respiratory Syndrome (SARS) period. He said, "The Chinese Academy of Social Sciences estimated that the country's growth rate in the first quarter will fall below 5% due to this situation."

Major countries' interest rates sharply declined due to safe asset preference caused by the novel coronavirus spread, expectations of monetary easing policies, and attacks by Yemeni rebels on Saudi Arabia's oil facilities. The US 10-year bond yield dropped from 1.82% on the 17th of last month to 1.59% on the 30th of the same month. During the same period, the UK’s rate fell from 0.66% to 0.56%, and Germany’s from -0.21% to -0.40%, respectively.

In South Korea, interest rates also sharply declined, especially in the 10-year sector, which had recently experienced a significant rise. In the bond market, the fact that during the SARS and Middle East Respiratory Syndrome (MERS) shocks, two rounds of base rate cuts accompanied economic stimulus measures has raised the possibility of additional base rate cuts again. However, Senior Researcher Kim explained that during the SARS outbreak, the economy was vulnerable due to the credit card crisis, and in the case of MERS, South Korea was the second largest infected country, which posed a higher downside risk to the economy.

Market interest rates widened their decline mainly in the long-term sector due to concerns about economic slowdown from China and favorable government bond auction results. The 3-year and 10-year yields fell from 1.43% on the 17th of last month to 1.30% on the 30th, and from 1.74% to 1.55%, respectively.

Senior Researcher Kim said, "Until the period when the novel coronavirus spread intensifies, it is highly likely that financial market investment sentiment will remain subdued, making continued downward pressure on domestic and foreign interest rates inevitable along with increased volatility," adding, "considering the short-term sharp decline in domestic and foreign interest rates, the scope for further decline will be limited, but even if investment sentiment improves, it will be difficult for interest rates to rise rapidly due to concerns about economic shocks."

He continued, "Especially domestically, where the private economy's self-sustaining power is not strong, expectations for additional base rate cuts may strengthen, so downward pressure on interest rates is expected to outweigh rebound pressure," forecasting that the 3-year and 10-year government bond yields will range between 1.20%~1.43% and 1.48%~1.70%, respectively.

This content was produced with the assistance of AI translation services.