Weakness in Korean Government Bonds Amid US Economic Stimulus Measures

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] Last month’s decline in government bond yields has reversed sharply this month, linked to the U.S. presidential election and fiscal stimulus measures. Analysts say it is difficult for Korean Treasury bond yields to turn around immediately given the Bank of Korea’s limited monetary policy room.

According to the Korea Financial Investment Association on the 13th, the 3-year Treasury bond yield closed at 0.925% annually, up 1.8 basis points (1bp = 0.01 percentage points) from the previous trading day. The 5-year and 10-year Treasury bonds also rose by 1.8bp and 1.0bp, closing at 1.225% and 1.553%, respectively. The 3-year yield, which had fallen from 0.977% on the 1st of last month to 0.843% on the 28th, has risen again this month, increasing by 8.2bp over six trading days through yesterday. During the same period, the 5-year and 10-year yields, which were 1.273% and 1.582%, rose by 4.8bp and 2.9bp, respectively.

As bond yields have risen daily and the government bond market has weakened, the KOSEF Treasury Bond 10-Year Leveraged ETF has fallen for six consecutive trading days since the 28th of last month, dropping 2.1%, showing a sluggish trend in related exchange-traded funds (ETFs). This contrasts with the KOSPI’s 4.1% rise during the same period.

The recent rise in Treasury bond yields is interpreted as reflecting expectations for U.S. economic stimulus measures. With the presidential election approaching, economic indicators such as employment data have been weak, increasing the need for stimulus measures.

Jina Kim, a researcher at IBK Investment & Securities, explained, “During the Chuseok holiday, although U.S. President Trump tested positive for COVID-19, his condition improved faster than expected, which increased expectations that the fifth economic stimulus package agreement could be reached quickly around the election, rather than expanding financial market uncertainty. This, along with supply and demand concerns, led to the rise in yields.”

It is expected to be difficult for Treasury bond yields to break away from the current upward trend quickly. The Monetary Policy Committee meeting on the 14th is expected to unanimously keep the base rate unchanged. As confirmed in the minutes from August, the economic phase requires a continued accommodative stance, but no committee member advocated for further rate cuts. Additionally, neighboring countries like Australia, which had hoped for additional monetary easing, have revised their economic outlooks optimistically, reducing the likelihood of a decline in bond yields.

The ongoing supply burden due to the introduction of fiscal rules is also seen as a negative factor for the bond market. While the intention is to strengthen fiscal soundness management from a long-term perspective, it can be interpreted as a commitment to continue an expansionary fiscal policy until implementation, meaning large-scale Treasury bond issuance could become a burden.

On the 5th, the government announced plans to introduce fiscal rules to manage the national debt ratio within 60% of GDP and the consolidated fiscal balance within -3% of GDP starting in 2025. Dongsoo Shin, a researcher at Eugene Investment & Securities, explained, “Although the government is strengthening the demand base for Treasury bonds, depending on the investment environment, there is a high possibility that market absorption difficulties and frictional yield increases could occur, which may negatively affect foreign investors’ bond investment environment.”

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