Bond Market Focuses on 'Gyeonggi' Province... "Timing to Buy Long-Term Bonds"

78% Chance of 100bp Increase at July FOMC
Recession Risk Due to High-Intensity Tightening
Bond Market Focus Shifts from 'Monetary Policy' to 'Economy'
Increased Bond Market Volatility from June to August
"Timing for Staggered Purchases of Long-Term Bonds"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The bond market's focus has shifted from 'monetary policy' to 'economic conditions.' As the possibility of an economic recession arises due to the faster and stronger-than-expected implementation of high-intensity tightening policies, expectations that the Federal Reserve will cut interest rates again are being reflected in bond yields. Market experts predict that the downward stabilization trend of long-term bonds will become clearer.

According to the Korea Financial Investment Association on the 15th, the 3-year Treasury bond closed at an annual yield of 3.260%, up 4.9 basis points (1bp = 0.01 percentage points) from the previous trading day. Meanwhile, the 10-year bond yield fell by 0.6bp to 3.295% per annum.

Typically, long-term bonds reflect economic conditions, while short-term bonds are influenced by monetary policy (base rate hikes). The reason short-term bond prices surged in the bond market is that the likelihood of the Federal Reserve raising rates by 100bp at the July 28 FOMC meeting (local time) has increased.

Due to the U.S. Consumer Price Index (CPI) in June rising 9.1% year-on-year, higher than expected, the probability of a 100bp hike in July, as reflected in the federal funds futures market, rose from 11.8% (before the June CPI announcement) to 78%.

U.S. Treasury yields have experienced the largest divergence between short- and long-term rates since 2000. After the June CPI release, the 10-year Treasury yield rose from 2.95% to 3.10%, then retreated to 2.94%. The 2-year yield increased from 3.05% to 3.22%, closing at 3.18%. Unlike long-term bonds, the decline was not as significant.

When the yield curve between short- and long-term bonds inverts in the bond market, it is interpreted as a signal of an economic recession. Since 1990, there have been a total of 21 instances of 2-10 year yield curve inversions excluding this July. The average duration of inversion was 36 days, with an average maximum inversion magnitude of 7.8bp.

Researcher Kim Sang-hoon of Hana Securities explained, "In July, the inversion duration has already exceeded 9 days, and the maximum inversion magnitude has surpassed 20bp, which indicates that the bond market reflects the central bank's intention to continue tightening policies to stabilize inflation, even at the cost of economic slowdown."

The bond market is simultaneously expressing concerns about an economic recession while expecting the Federal Reserve's high-intensity tightening efforts to control inflation. Recently released economic indicators suggest that the focus of monetary policy is shifting from inflation to growth slowdown.

On the 12th (local time), the International Monetary Fund (IMF) lowered its forecast for U.S. real Gross Domestic Product (GDP) growth from 2.9% to 2.3%, a 0.6 percentage point cut. This adjustment came less than a month after a previous revision from 3.7% to 2.9%.

Researcher Kim analyzed, "Monetary policy may focus on growth slowdown, and if inflation remains high despite worsening economic conditions, the central bank may not change its rate hike stance. Both scenarios affect demand for long-term bonds." In a broad sense, the bond market has reached an inflection point (bottom), implying that long-term bonds should be purchased in installments.

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