"May 3-Year Treasury Bond Band 2.80~3.05%... Too Early for Chase Buying"

[Asia Economy Reporter Hwang Yoon-joo] Shinhan Financial Investment expects the Bank of Korea to raise the base interest rate consecutively in May and analyzes that it is still too early to chase-buy government bonds.

Researcher Ahn Jae-kyun of Shinhan Financial Investment stated, "We present a range of 2.80~3.05% for the 3-year government bond, 3.05~3.35% for the 10-year government bond, and a 3/10-year spread band of 25~30bp in May," he said.

Researcher Ahn explained, "Concerns about monetary tightening due to high inflation are increasing," and added, "May, when the growth expectation remains valid in the mid-to-high 2% range, is judged to be a more appropriate time for an additional rate hike."

He analyzed, "As uncertainty over China's economy intensifies, there are concerns about negative impacts on domestic export-led growth, making it time to lower the annual 3% growth expectation," but also noted, "Expectations for domestic demand recovery, such as consumption and investment in the second quarter, are high, so the growth forecast in the May revised economic outlook is likely to remain solid." This means that inflation response is less burdensome at a time when growth expectations are firm.

Researcher Ahn cited 'expected inflation' as the reason for forecasting a base rate hike in May.

He pointed out, "Although the consumer price inflation rate is expected to remain below 2% over the next year, the April consumer sentiment survey showed that 47% of respondents expected inflation between 2% and 4%, the highest proportion."

The rise in inflation expectations among economic participants leads to strengthened forecasts of future price increases. This can create a vicious cycle by raising inflation anxiety and stimulating actual price rises.

Researcher Ahn diagnosed, "The current situation clearly requires the central bank to focus on price stability and calm the rise in expected inflation," adding, "Monetary policy operation will inevitably remain tight for the time being."

Although concerns exist that rising uncertainty in China's economy will negatively affect domestic exports, the high expectations for domestic demand recovery, such as consumption and investment in the second quarter, serve as the driving force to maintain the tightening stance.

Researcher Ahn evaluated, "The domestic conditions in the second quarter are expected to improve compared to the previous quarter," noting that "since mid-March, signs of improved consumer sentiment have appeared due to the phased lifting of social distancing measures, oil prices have somewhat stabilized, and political uncertainty has diminished, leading to expectations for investment resumption in the second quarter."

He forecasted, "High inflation and monetary tightening are expected to continue in May, delaying improvements in bond market investment sentiment."

He added, "Although some perception of a peak in bond yields has formed, it is not too late to respond after confirming domestic and international events up to the May Monetary Policy Committee meeting."

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