Base Interest Rate Cut to 0.5% per Year... "Bond Market Expected to Show Short-Term Bullish Trend"

[Asia Economy Reporter Eunmo Koo] As the Bank of Korea lowered the base interest rate to an all-time low, the domestic bond market is expected to show a short-term bullish trend. However, there are also concerns that bond yields could face upward pressure depending on the size of the government's third supplementary budget to be announced next month.

On the 28th, the Bank of Korea held a Monetary Policy Committee meeting and decided to cut the base interest rate by 0.25 percentage points from 0.75% to 0.50% per annum. With this rate cut lowering the benchmark rate, the domestic bond market is expected to show a short-term upward trend. On the 25th, the 3-year government bond yield fell to 0.815%, reaching an all-time low amid expectations of a rate cut, and this recent cut has reduced the possibility of further declines.

Changseop Oh, a researcher at Hyundai Motor Securities, said, "Considering market consensus and Korea's economic conditions, the 0.5% rate level can be seen as the effective lower bound." He added, "Since government bond issuance is expected to increase significantly in relation to the upcoming third supplementary budget, the recent downward trend in yields is likely to come to an end." Gong Dongrak, a researcher at Daishin Securities, also said, "Given recent circumstances, 0.5% is likely to be the lower bound for the base interest rate," and predicted, "As expectations for further cuts disappear, the domestic bond market may show a short-term rally."

In the long term, a boxed range with both upper and lower limits is expected to continue. Researcher Gong said, "Even if the bond market shows strength in the short term, as policy momentum fades, selling demand may arise, so in the long term, although the range will not be large, a bearish trend may appear." He added, "The key is to watch how much government bond issuance will increase after next month's supplementary budget."

Researcher Miseon Lee of Bukook Securities also said, "If the third supplementary budget to be announced early next month exceeds expectations, it could act as a factor pushing yields higher," but added, "Since the Bank of Korea has expressed its intention to use all means to stabilize the market, the upward pressure on yields is expected to be limited."

However, there is also an analysis that long-term bonds such as the 10-year bonds may see further declines. Researcher Lee pointed out, "There is a possibility of further declines mainly in long-term bonds as the economic slowdown caused by the COVID-19 pandemic and recession risks are reflected."

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