US Zero Interest Rate Leads to Stronger Treasury Bonds... Bank of Korea Also Makes a 'Big Cut', Strengthening Stabilization

3-Year and 10-Year Korean Treasury Bond Yields Fall
Bond Strength Supported by Liquidity Support and Monetary Easing Policies

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] The domestic bond market turned bullish as the U.S. central bank, the Federal Reserve (Fed), lowered the benchmark interest rate to 'zero (0)' level. With the Bank of Korea also holding an emergency Monetary Policy Committee (MPC) meeting to cut the base rate by 0.5 percentage points, the bond market is expected to enter a stabilization phase again.

According to the Korea Financial Investment Association on the 17th, the 3-year government bond yield in the Seoul bond market closed at 1.099% per annum, down 5.0 basis points (1bp=0.01 percentage points) from the previous trading day. The 10-year yield also fell 4.6bp to 1.524% per annum, halting the upward trend that had continued throughout last week. Government bond futures prices rose, causing yields to decline. According to the Korea Exchange, the March settlement price of the 3-year government bond futures rose 0.28 points (0.25%) to 111.30 compared to the previous day, and the March settlement price of the 10-year government bond futures increased 1.04 points (0.79%) to 131.94 at the close.

Despite the sharp decline in the government bond market last week, yields rose. This was because fears of an economic recession due to the novel coronavirus disease (COVID-19) pushed up even the safe-haven government bond yields. This trend was contrary to the usual pattern where yields fall and prices rise as demand for safe assets strengthens when the stock market plunges. Yoonsam Yoon, a researcher at Meritz Securities, explained, "The extreme fear sweeping the financial market temporarily intensified cashing out and liquidity." Last week, the 3-year government bond yield rose 7bp and the 10-year yield increased 20bp, closing at 1.149% and 1.570%, respectively.

However, with the Fed's rate cut causing government bond yields to turn downward yesterday, the direction of bond yields has returned to the usual trend. On the 15th, the Fed cut the benchmark interest rate by 1 percentage point from 1.00?1.25% per annum to 0.00?0.25% per annum in response to the impact of COVID-19. It also decided to purchase $700 billion worth of government bonds and mortgage-backed securities (MBS) to expand liquidity supply.

Starting from the yield decline yesterday, it is analyzed that government bond yields are likely to stabilize downward. Although the supply-demand burden due to discussions on increasing the supplementary budget is not insignificant, the easing policies such as liquidity support from major central banks are expected to support the bond bullish trend. The Bank of Korea’s rate cut decision yesterday is expected to further strengthen this direction. The Bank of Korea held an emergency MPC meeting and announced a 0.50 percentage point cut in the base rate from 1.25% to 0.75%. This is the first time the domestic base rate has entered the 0% range in history.

Researcher Dongsu Shin of Eugene Investment & Securities said, "The Bank of Korea’s future monetary policy will focus on liquidity support through unconventional measures," adding, "Since the stance is to stabilize by purchasing government bonds if yields rise due to increased government bond issuance from the supplementary budget, investment risk has eased despite supply-demand burdens." Researcher Jiman Kim of Samsung Securities also forecasted, "Although a strong monetary policy implemented at once can stimulate economic expectations and cause yields to rebound, the 50bp cut can be seen as a surprise compared to the previously passive approach, so there is a greater possibility of yields falling."

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