Directionless National Treasury Bond Yields... The Key Is Easing Liquidity Concerns

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] Despite efforts to stimulate the economy through domestic and international monetary policy coordination and fiscal expansion, government bond yields have failed to show a clear direction. This is due to ongoing uncertainties surrounding the novel coronavirus disease (COVID-19) and international oil prices, which continue to fuel liquidity concerns. As volatility risks are expected to persist until these liquidity concerns are resolved, experts point out the need for additional measures beyond those already announced.

According to the Korea Financial Investment Association on the 24th, the 3-year government bond yield in the Seoul bond market closed at an annual rate of 1.153%, up 4.6 basis points (1bp = 0.01 percentage points) from the previous trading day. After turning bullish with an 8.6bp drop on the 20th, it reversed to bearish again just one day later. The 10-year bond yield also rose by 10.7bp to 1.718%, failing to maintain its bullish momentum.

Recently, government bond yields have struggled to stabilize despite emergency rate cuts by the U.S. Federal Reserve (Fed) and the Bank of Korea. Although anxiety somewhat eased following the announcement of the Korea-U.S. currency swap agreement and the establishment of the Bond Market Stabilization Fund (BMSF) in the latter half of last week, the rise was only partially reversed, mainly in the short- and medium-term maturities.

Persistent liquidity concerns are cited as the main cause of recent volatility in government bond yields. While global financial market anxiety has somewhat eased due to enhanced monetary easing cooperation among major countries and fiscal expansion efforts to stimulate the economy, the ongoing spread of COVID-19 and uncertainties in international oil prices continue to raise fears of a sharp decline in asset values. Sanghoon Kim, a researcher at KB Securities, explained, “The phenomenon is primarily driven by an extreme demand for dollar cash, with domestic short-term money market tightening also partially influencing the rise in long-term interest rates.”

Ultimately, as volatility risks in government bonds are expected to persist until liquidity concerns are resolved, overall financial market stability?including stock prices and the value of the Korean won?is necessary to bring down interest rates. Researcher Kim stated, “When measures such as the BMSF and liquidity supply by the Bank of Korea take effect and stabilize the short-term money market, long-term interest rates will also follow suit. Given market characteristics, more robust measures exceeding expectations, such as unconditional corporate bond purchases, are needed to make interest rate stabilization visible.”

To prevent further volatility expansion, experts emphasize the need for more aggressive responses in addition to existing measures. Jaekyun Ahn, a researcher at Korea Investment & Securities, said, “From now on, three measures are necessary: expanding the scale of currency swaps, increasing the scale and frequency of simple purchases, and additional liquidity supply focused on the short-term money market.” He added, “Only after all these policies are implemented can we discuss the upper and lower bounds of bond yields.” Although financial authorities have announced plans to establish the BMSF and the Securities Market Stabilization Fund, more bold and proactive management of current measures is required to prevent volatility expansion in the bond market and the broader financial market. Yosam Yoon, a researcher at Meritz Securities, also advised, “As the burden of the second supplementary budget increases, interest rate stabilization policies become even more necessary. Direct purchases, such as government loans, are key to responding to government bond yield instability as a Korean-style quantitative easing.”

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