10-Year Korean Treasury Bond Nears 1.9%... Eyes on BOK Purchase Decision

Advance Disclosure of Purchase Scale Like Last Year, Possibility to Respond While Monitoring Market Conditions

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance (left), and Lee Ju-yeol, Governor of the Bank of Korea, are greeting each other at the Macroeconomic Finance Meeting held on the morning of the 18th at the Bankers' Hall in Jung-gu, Seoul.
[Photo by Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The yield on government bonds continues its high-flying trend. As the payment of the 4th disaster relief fund next month becomes certain, the fiscal burden increases, driving up government bond yields. Some market forecasts even suggest that the 10-year government bond yield could rise to 2%.

According to the Korea Financial Investment Association's Bond Information Center on the 19th, the 10-year government bond yield in South Korea has consistently stayed above 1.8% since the 8th.

The 10-year government bond yield closed at 1.854% the previous day, and on the 15th, it rose to 1.871%, threatening to reach 1.9%. The 10-year government bond yield hitting the 1.8% range is the first time in 15 months since November 2019, when expectations of a trade deal between the U.S. and China were reflected.

Both domestic and international factors are contributing to the rise in government bond yields. The U.S. 10-year Treasury yield rose to 1.3%, reflecting expectations of economic recovery due to the Biden administration's large-scale stimulus package, and inflation premiums as crude oil prices surpassed $60 per barrel. Domestically, it is expected that additional government bonds were issued due to the burden of securing funds for the disaster relief payments, which fueled the rise in yields. Up to 20 trillion won worth of government bonds could be additionally issued, and in this case, the increased supply of government bonds in the market naturally leads to a price drop (and thus a rise in yields).

There is growing market expectation that the Bank of Korea may soon announce plans to purchase government bonds. This expectation grew stronger after Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki and Bank of Korea Governor Lee Ju-yeol officially met the previous day. At the macroeconomic and financial meeting held at the Seoul Banking Hall, Deputy Prime Minister Hong stated, "Close cooperation and coordination among macroeconomic, fiscal, monetary, and financial authorities are absolutely crucial for overcoming the crisis and economic recovery in Korea." This is interpreted as implying cooperation between fiscal and monetary authorities, such as government bond purchases. In fact, the 10-year government bond yield fell to 1.84% around the time the economic leaders met. While the exact timing of the Bank of Korea's government bond purchases cannot be predicted, trust has been built that they will coordinate to prevent disruption in the bond market.

Gong Dong-rak, a researcher at Daishin Securities, said, "Since the beginning of the year, there has been a belief in the bond market that the Bank of Korea's help is physically necessary," adding, "Rather than targeting a specific yield to purchase government bonds, the purchase timing will be when the bond market becomes unstable, affecting asset markets and increasing corporate financing costs."

Governor Lee stated at last month's Monetary Policy Committee meeting, "If interest rate volatility increases, we will consider simple government bond purchases and other measures to stabilize the market." The market expects that, as last year, the Bank of Korea will announce in advance the scale and timing of government bond purchases over a certain period. Last September, the Bank announced plans to purchase a total of 5 trillion won worth of government bonds in four rounds by the end of the year and then proceeded with the purchases.

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