Government Bond Yields Reach Highest in 8 Years... Lengthening Winter for the Bond Market

Fed Signals 'Big Step'... 0.5%p Rate Hike Possible in May
Additional Budget Unavoidable... Concerns Over Supply and Demand Due to Government Bond Volume

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The yield on Korean government bonds surged sharply amid concerns over the possibility of a ‘big step’ (raising the benchmark interest rate by 50 basis points at once) by the U.S. and the prospect of an additional supplementary budget (chugyeong) in South Korea. The bond market is expected to struggle going forward.

According to the Korea Exchange on the 29th, the yield on 3-year government bonds in the Seoul bond market closed at 2.747%, up 24.2 basis points from the previous trading day. This is the highest level since June 2014. The 5-year bonds closed at 2.970%, up 25.7 basis points, and the 10-year bonds closed at 3.031%, up 16.0 basis points.

The bond market contracted significantly because on the 16th (local time), Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), hinted at a ‘big step’ interest rate hike. Following Goldman Sachs, Citibank also predicted that ‘big step’ rate hikes would occur twice in the second quarter and twice in the third quarter. If the Fed proceeds with six rate hikes as forecasted this year, the U.S. benchmark interest rate will be raised to 3.00% by the end of the year.

When the benchmark interest rate rises, U.S. bond yields increase, prompting investors to sell Korean government bonds to buy higher-yielding U.S. Treasury bonds. This worsens the supply-demand balance of Korean government bonds, causing yields to rise. The fact that the 3-year government bond yield has hit new highs for five consecutive trading days since the 22nd reflects these concerns following Chairman Powell’s remarks.

President-elect Yoon Suk-yeol is leaving the transition committee office set up at the Financial Supervisory Service Training Institute in Tongui-dong, Seoul, on the 28th to go out./Photo by Transition Committee Press Corps

Moreover, concerns are growing over the possibility of a supplementary budget and the authorities’ passive response during the regime change period. President-elect Yoon Seok-yeol has claimed that he will secure supplementary budget funds of around 50 trillion won solely through expenditure restructuring, but the consensus in the bond market is that a significant amount of government bonds will inevitably be issued this year. The Moon Jae-in administration focused fiscal spending in the first half of the year to respond to COVID-19 and plans to execute 63% of the budget early this year as well. Considering this, even if expenditure restructuring is enforced in the first half, a supplementary budget in the second half is seen as unavoidable.

Shin Eol, a researcher at SK Securities, said, "Since COVID-19, the supply of bonds has increased due to supplementary budgets, and every early-week competitive bidding for government bonds has become a trend of cautious supply." He added, "When yields rise sharply like this, the Ministry of Economy and Finance has hinted at fine adjustments through verbal interventions in notably weak segments, but currently, there is no such intervention, and the market does not expect any." With Lee Chang-yong, the new candidate for Governor of the Bank of Korea, about to arrive, the Bank of Korea is effectively in a leadership vacuum. This means it is difficult to lead market stabilization policies."

Guk Dong-rak, a researcher at Daishin Securities, also analyzed, "Considering that immediate measures from the authorities are unlikely, a quick turnaround in market sentiment also seems difficult. Until the perception of the upper limit of yields is confirmed, buying responses will be challenging."

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