Interest Rate Spread Narrowing, Gradual Slowdown Expected

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[Asia Economy Reporter Junho Hwang] As the gap between long-term and ultra-long-term interest rates gradually narrows, there is a forecast that the pace of this narrowing will slow down in the future.

Shinhan Financial Investment on the 23rd presented the bond yield range for next week as 1.05~1.25% for the 3-year Treasury and 1.90~2.15% for the 10-year Treasury. Amid conflicting factors such as expectations for economic improvement and concerns over a resurgence of COVID-19, it is expected that yields will remain stable following the stabilization of U.S. Treasury yields.

They also expect the spread narrowing trend between long-term (10-year) and ultra-long-term (30-year) yields to continue. This can be seen as a result of the stabilization of U.S. Treasury yields and the highlighted attractiveness of high domestic interest rates. However, the extent of the narrowing is expected to have limits. Economic indicators centered on the U.S. are showing signs of improvement, which could pressure U.S. Treasury yields at any time. The peak for U.S. Treasury yields this year is estimated to be around 2%, which could also impact the domestic market.

However, while the Federal Reserve can alleviate the burden of issuing long-term and ultra-long-term bonds in the U.S. Treasury market, domestically, most of the demand must be absorbed by internal institutions rather than the Bank of Korea. If, as in January this year, insurance companies delay fund execution, the spread could widen again.

Myungsil Kim, a researcher at Shinhan Financial Investment Research Center, stated, "In conclusion, the narrowing trend of the 3/10-year and 10/30-year yield spreads is expected to gradually slow down." He added, "Due to the conflicting uncertainties about the resurgence of COVID-19 and economic expectations driven by vaccine hopes, it is difficult to predict an appropriate spread level, but it is a time to be cautious of the risk that the recently narrowed spreads could widen again in the short term." He further noted, "The additional narrowing of the 10/30-year yield spread, which has relatively narrowed significantly, is expected to be limited, and the possibility of increased volatility in ultra-long-term yields around the 20-year auction at the end of the month should also be considered."

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