Despite BoK Market Measures, Bond Market 'Unstable'... "Awaiting FOMC Outcome"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minji Lee] Despite the Bank of Korea's proactive market measures, opinions suggest that instability in the bond market is unlikely to subside. Investor sentiment is expected to change significantly depending on the outcome of the March Federal Open Market Committee (FOMC) meeting.

According to the Bond Information System of the Korea Financial Investment Association on the 17th, as of the 16th, the 3-year and 5-year government bonds recorded yields of 1.17% and 1.602%, respectively. Both bonds fell by approximately 6 basis points (0.06%) and 2 basis points compared to the previous day. The 3-year bond, which fluctuated in the 1% range earlier this month, sharply rose to the 1.2% range due to the rise in U.S. Treasury yields but slightly declined following active market interventions by the Bank of Korea and the Ministry of Economy and Finance.

An increase in bond yields indicates a decline in bond prices. Until last month, government bond yields rose mainly in long-term bonds due to expanded expected inflation, a sharp surge in the U.S. 10-year Treasury yield, and increased supplementary budget burdens from the fourth round of disaster relief payments. The 10-year government bond yield soared to the high 1.9% range, reflecting decreased attractiveness of the asset, which caused yields to rise (prices to fall). Since the beginning of this month, medium-term bonds such as the 3-year and 5-year have also shown a steep upward trend, attributed to growing sentiment that the U.S. Federal Reserve (Fed) might raise the benchmark interest rate faster than expected.

Although the Bank of Korea and the Ministry of Economy and Finance are attempting to curb the rise in yields, market sentiment remains pessimistic. The Bank of Korea announced a simple purchase of 2 trillion won worth of government bonds on the 9th and on the 15th stated that it is considering additional purchases beyond the planned 5 to 7 trillion won in government bond purchases scheduled for the first half of the year. They also showed a strong willingness to actively quell bond market instability by significantly reducing the issuance of 2-year Monetary Stabilization Bonds. However, the market believes that external factors have a greater impact on investor sentiment than the Bank of Korea’s government bond purchases, suggesting that the slightly lowered yields may rise again.

Researcher Somin Yeo of Eugene Investment & Securities said, "Since the burden of supply has not been fully resolved by the one-time intervention for market stabilization and U.S. interest rate volatility remains high due to expectations of economic recovery, the effect of the Bank of Korea’s intervention will be limited," adding, "Given that the rise in yields reflects economic recovery, it will be difficult to return the 3-year government bond yield to the pre-surge level of around 1%."

An event to watch is the FOMC outcome scheduled for the 18th (Korean time). If the Fed signals a rate freeze until the end of 2023 and extends the supplementary leverage ratio (SLR) relief measure introduced to increase Treasury purchases, volatility in the bond market is expected to decrease. Last April, in response to expanded fiscal stimulus, the Fed implemented the SLR relief measure to exclude U.S. Treasury purchases from risk asset calculations, allowing banks to increase Treasury purchases. Market experts predict that if the extension is not made, forced selling of Treasuries will occur, significantly increasing volatility.

Researcher Jaekyun Ahn of Korea Investment & Securities explained, "Due to the sharp rise in medium- to long-term government bonds, corporate bond yields have also recently surged," adding, "If the March FOMC produces the results desired by the bond market, investor sentiment is expected to improve, focusing on short-term bonds that surged rapidly rather than long-term bonds with high economic recovery expectations and supply-demand burdens."

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