The Bond Market Finds Stability Amid the Bank of Korea's 'Dovish Message'

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] As the Bank of Korea expressed its intention to actively purchase government bonds to stabilize the supply and demand of government bonds, the bond market is interpreting this as a 'dovish message.'

Although the base rate was sharply cut to 0.75% last month, long-term bond yields did not fall accordingly. In response, Governor Lee Ju-yeol explained the background of the outright bond purchases at a press conference following the Monetary Policy Committee meeting on the 9th, saying, "It is expected that government bond issuance will increase this year to respond to the novel coronavirus disease (COVID-19). We plan to stabilize the market by stabilizing the supply and demand of government bonds, and in that context, we will actively conduct government bond purchases."

As soon as Governor Lee's remarks were conveyed, government bond yields fell sharply. On the 9th, when the Monetary Policy Committee meeting was held, the 3-year government bond yield closed below 1% for the first time in the Seoul bond market.

On the 10th, the 3-year government bond yield fell by 1.6 basis points (1bp = 0.01 percentage points) to 0.970%, and the 5-year yield dropped by 0.8bp to 1.194%. However, the 10-year yield closed up by 0.6bp at 1.444%.

Market participants expect the bond market rally (decline in bond yields) to continue for the time being. This is because Governor Lee not only met expectations by making remarks about additional government bond purchases at this Monetary Policy Committee meeting but also delivered a more proactive message than anticipated.

A bond market expert said, "The market interpreted Governor Lee's message positively. Ultimately, if government bond yields stabilize, short-term yields and credit yields also tend to stabilize, and Governor Lee's remarks are expected to have a sequential impact."

However, as discussions on the second and third supplementary budgets continue, there are voices hoping for additional measures. There are also calls for the scale of future additional government bond purchases to increase.

The Bank of Korea conducted its second outright government bond purchase since the spread of COVID-19 on the 9th. Outright purchases are one of the open market operations through which the Bank of Korea supplies liquidity to the market. Unlike repurchase agreement (RP) transactions, which involve buying or selling securities after a certain period, outright purchases are a permanent liquidity adjustment tool. The scale of government bonds purchased outright on that day was 1.5 trillion won (face value basis).

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