Despite 'Emergency Purchase'... Experts Say "Insufficient to Prevent Bond Yield Increase"

Government Bond Yields Rise 0.51%p in October Alone... Twice the Increase in the US
US Tapering and Bank of Korea Rate Hikes
Possible Further Increase Despite Authorities' Intervention
Market Linkage Increases Burden on Households and Businesses

[Asia Economy Reporter Jang Sehee] As the possibility of tapering (asset purchase reduction) in the U.S. and interest rate hikes in Korea increases, the outlook that government intervention will not stop the rising trend of government bond yields is gaining weight. Earlier, the Ministry of Economy and Finance decided to carry out an emergency buyback worth 2 trillion won as government bond yields surged, but it is evaluated as insufficient to curb the rise in market interest rates.

Lee Miseon, a researcher at Hana Bank Financial Investment, said on the 3rd, "As the end of asset purchases approaches, expectations for base rate hikes increase," adding, "U.S. short-term bond yields are expected to be higher in the second half of next year than now." She added, "Since U.S. Treasury and Korean government bond yields show synchronization, there may be short-term reactions." This means that if U.S. bond yields rise, domestic government bond yields may also be affected. A Bank of Korea official said, "Market interest rates reflect expectations that the base rate will rise to 1.50~1.75% by the end of next year," but also said, "If specific details about U.S. tapering come out, there is sufficient possibility of further increases."

The International Finance Center also forecasted in the ‘2022 Global Economy and International Finance Major Issues and Outlook’ that "Major countries’ interest rates are expected to gradually rise next year due to expectations of policy rate hikes and inflation risks."

According to the Ministry of Economy and Finance, the 3-year maturity government bond yield, a representative market interest rate, rose by 51 basis points (1bp=0.01 percentage point) in October alone. This is twice the increase in the U.S. (24bp).

On the 1st, in the Seoul bond market, the 3-year maturity government bond yield closed at 2.108% per annum, up 0.5bp from the previous trading day. This was the highest level in 3 years and 3 months since August 2, 2018. The 10-year bond yield also increased its volatility by rising 33bp and 34bp in September and October, respectively. During the same period, the U.S. 10-year Treasury yield only rose by 18bp and 7bp.

However, as of 10 a.m. on the same day, the 3-year maturity government bond yield fell 3.6bp from the previous trading day to 2.002%, and the 10-year maturity government bond yield dropped 2.2bp to 2.458%. This was due to the continued effect of government intervention from the previous day.

The market evaluates global inflationary pressures, the U.S. Federal Reserve’s tapering, and expansionary fiscal policies as factors raising bond yields. Since these affect market interest rates, they inevitably translate into burdens on households and companies. Also, the government’s plans to secure funds needed for expansionary fiscal policy may face setbacks.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "The rise in government bond yields increases the interest burden on households and companies," adding, "If the upward trend continues, the government may also feel burdened in issuing government bonds."

The government plans to take additional market stabilization measures if bond yields move excessively. A Ministry of Economy and Finance official said, "Since the volatility in the government bond market may further expand depending on the results of the U.S. Federal Open Market Committee (FOMC) meeting, we are conducting thorough monitoring," adding, "We will also respond considering the results of this month’s Monetary Policy Committee meeting as a factor that could increase volatility."

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