"Bond Yields Rise Further"... Bond Market Sentiment Worsens Amid 'Interest Rate Spasm'

[Asia Economy Reporter Ji Yeon-jin] Amid concerns over monetary tightening by major countries including the United States and soaring inflation, the yield on 3-year government bonds has surged to its highest level in over nine years, with a prevailing outlook that bond yields will rise further.

According to the May interest rate outlook 'Bond Market Survey Index' (BMSI) released by the Korea Financial Investment Association on the 12th, 7 respondents expected 'interest rate decline' while 70 expected 'interest rate rise,' resulting in an index value of 37.0. The figure was 85.0 in the previous month. The BMSI decreases as the number of respondents expecting the market to weaken (interest rate rise) exceeds those expecting it to strengthen (interest rate decline).

The comprehensive BMSI for May dropped further to 78.9 from 86.4 in the previous month. The comprehensive BMSI is calculated based on cumulative responses (1,100 respondents) to 11 individual survey questions (167 expecting improvement, 399 expecting deterioration, 534 expecting stability), indicating that bond market sentiment worsened compared to the previous month.

On the previous day in the Seoul bond market, the yield on 3-year government bonds closed at 3.186% per annum, up 19.9 basis points (bp, 1bp=0.01 percentage points) from the previous trading day, marking the highest level in 9 years and 9 months. The 10-year bond yield also rose by 13.6bp to 3.305% per annum, reaching its highest level in about 8 years, while the 5-year and 2-year yields increased by 18.7bp and 17.7bp respectively, closing at 3.303% and 2.981% per annum.

Notably, the yield on the ultra-long 30-year bond (3.146%) surpassed that of the 3-year bond (3.186%) for the first time since the introduction of the 30-year government bond in September 2012. The inversion of long- and short-term yields is interpreted as a precursor to an economic recession.

Government bond yields have been rising sharply since the beginning of the year amid concerns that the U.S. will pursue more aggressive monetary tightening than expected. The 3-year government bond yield rose by more than 1 percentage point from 1.855% on January 3 over about four months. The global surge in interest rates continues, and domestically, policy uncertainty is high due to the regime change period. The bond market has been in a bearish phase for over a year and a half, lacking factors to revive weakened investor sentiment. Additionally, speculation that the Bank of Korea may raise the base interest rate this month has further contracted the bond market.

Yoon Yeo-sam, a researcher at Meritz Securities, explained, "Although there was an advantage in that domestic monetary policy moved preemptively, the Financial Services Commission in April, which was expected to take a break, and the transition team's inflation concerns exceeding 4% year-on-year will be burdensome factors despite the vacancy in the Bank of Korea governor position." He added, "In a market where the freeze on the base rate is the prevailing expectation, the shock of a rate hike could be greater."

According to a survey by the Korea Financial Investment Association on the interest rate decision of the Bank of Korea's Monetary Policy Committee scheduled for the 14th, 50% of respondents expected a rate hike, while the other 50% expected the rate to remain unchanged, showing a tight split.

Kim Ji-man, a researcher at Samsung Securities, forecasted, "The bond market is likely to react sensitively to domestic and international inflation indicators for March, which will be announced by mid-April. Only if there are signals of easing inflation will the bond market find some stability, and the volatile market conditions are expected to continue for the time being."

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