The Variable Effects of Interest Rate Inversion Over Time

Analysis of 3 Past Cases of Korea-US Interest Rate Inversion
Two Bear Markets Following Rate Inversions
"Domestic Stock Market Inversion During Bull Runs... Different from Now"

[Asia Economy Reporter Ji Yeon-jin] As the U.S. Federal Reserve (Fed) is expected to implement at least a 'giant step' (a 75 basis point interest rate hike) by the end of this month, the domestic stock market generally experienced a downturn during past periods of Korea-U.S. interest rate inversion.

According to a report published on the 18th by DB Investment Securities, there have been three instances of Korea-U.S. interest rate inversion from 1995 to the present. First, in the 1990s, the U.S. experienced long-term prosperity based on a strong dollar, leading to inflation from the late 1990s. To curb inflation, the Fed implemented consecutive interest rate hikes, resulting in a Korea-U.S. interest rate inversion in 1999. At that time, the domestic stock market showed a sharp rise as the economy recovered right after the International Monetary Fund (IMF) bailout crisis, but a downward trend followed after the interest rate inversion.

The second instance occurred from August 2005 to September 2007. The mid-2000s were a period of continued global economic boom, including Korea and the U.S., with demand surging and inflation occurring. The U.S. began raising its benchmark interest rate from 2004, and Korea started from 2005, but Korea's rate hikes lagged behind, causing the Korea-U.S. interest rate inversion. However, the domestic stock market subsequently showed an even steeper rise, continuing until just before the 2008 global financial crisis.

The most recent case was from March 2018 to February 2020. The U.S. began normalizing interest rates from the end of 2015 and raised benchmark rates, while Korea, hit by export shocks due to the U.S.-China trade dispute in 2018, found it difficult to significantly raise its benchmark rate. Following the Korea-U.S. interest rate inversion, the domestic stock market showed a downward trend, giving back all gains made from 2016 to 2017.

However, during past Korea-U.S. interest rate inversion periods, the domestic stock market showed an overall upward trend. This time, though, since the inversion is occurring amid a declining domestic stock market since last year, it is difficult to find a precedent. Kang Hyun-ki, a researcher at DB Investment Securities, said, "It is important to note that in previous cases of Korea-U.S. interest rate inversion, the Korean stock market had already experienced significant price increases beforehand," adding, "The Korean stock market has already fallen considerably, with a trailing price-to-book ratio (Trailing PBR) remaining at 0.9 times, which is at a financial crisis level, so it is difficult to predict further declines in the Korean stock market based on past cases."

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