'Heavy Rain in 115 Years' - Will the Bond Market Also Be Hit?

[Asia Economy Reporter Ji Yeon-jin] Record-breaking heavy rain, the worst in 115 years, has occurred this month, raising concerns that it could stimulate inflation and shake the domestic bond market.

According to a report published by KB Securities on the 13th, most of this year's heavy rain damage occurred in the Seoul metropolitan area, with the most severe damage attributed to vehicle flooding. This is an issue to be resolved by the private sector, such as non-life insurance companies. Compared to past natural disasters that caused crop flooding damage, the possibility of supplementary budget allocation is low, so the impact on the bond market is expected to be minimal.

In past natural disasters, the scale of supplementary budgets was 4.1 trillion won for Typhoon Rusa in 2002, 3 trillion won for Typhoon Maemi in 2003, and 2.2 trillion won for Typhoon Ewiniar and heavy rain in 2006. Researcher Lim Jae-gyun of KB Securities said, "Even if supplementary budgets are mentioned, the time until final approval will be short," adding, "Considering that the period of greatest uncertainty in the bond market is until the final approval of the supplementary budget, even if it is allocated, the period during which the bond market is affected will be short."

However, concerns remain that this heavy rain could further stimulate inflation ahead of Chuseok next month. Although the damage scale is not larger than in the past, there is crop damage, and the consumer price index in July recorded 6.3%, the highest since the International Monetary Fund (IMF) foreign exchange crisis. Since the fresh food price index rose 13.0% year-on-year in July due to reduced cultivation area, there is a possibility that fresh food prices will rise further due to this heavy rain.

Moreover, this year's Chuseok falls relatively early, from September 9 to 12, and with rain forecasts expected until next week, if crop damage expands, it could further stimulate prices. In fact, in 2002, a typhoon before Chuseok caused fresh food prices to rise sharply, and in 2003, a typhoon during Chuseok led to price increases in fresh food after the holiday, pushing inflation up.

Researcher Lim said, "While Korean inflation is expected to peak in the third quarter, if domestic inflation rises more than expected or the peak is delayed due to heavy rain and Chuseok, the Bank of Korea may consider additional base rate hikes," adding, "Although the possibility of rate cuts cannot be ruled out due to the 2023 economic recession as the market expects, there will be no rate cuts until price stability is achieved, and there is also a possibility of rate hikes in 2023. Therefore, we maintain a recommendation to sell on dips rather than chase buying 3-year government bonds." He also added, "We continue to maintain a capital gain strategy through purchasing long-term bonds such as 10-year government bonds in preparation for the economic recession."

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