'Higher and Longer' Powell's Giant Step... Stirring Bond Market Anxiety

Powell, Chair of the US Federal Reserve, Predicts Prolonged Interest Rate Hike Cycle
Bond Yields Rise Across the Board
Financial Services Commission Activates ChaAn Fund and Supplies Over 50 Trillion Won in Liquidity

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] Recent interest rate guidance remarks by Jerome Powell, Chair of the U.S. Federal Reserve (Fed), are once again stirring the bond market. The government, which has announced market stabilization measures exceeding 50 trillion won, began operating the bond stabilization fund this week, and bond yields have been fluctuating again since the Federal Open Market Committee (FOMC) interest rate decision on the 2nd (local time).

According to the Korea Exchange on the 4th, as of 10 a.m., the 3-year maturity government bond (Treasury 01125-2406(21-4)) yield in the general bond market rose by 1.25 basis points to 4.160%, with most bond yields showing an upward trend. The previous day, major bond yields, except for negotiable certificates of deposit (CD, 91 days), also rose across the board. The 1-year government bond yield closed at 3.901%, marking a new yearly high, and commercial paper (CP, 91 days) also hit a yearly peak at 4.81%.

The Fed’s 'giant step' of raising the benchmark interest rate by 75 basis points as expected has sent a contradictory message of adjusting the pace of tightening while raising the upper limit of interest rates, which is interpreted as causing market shock. Chair Powell said at the FOMC press conference this month, "At some point, it will be good to slow the pace of rate hikes, and that time could be as early as the next meeting," but also stated, "the terminal rate level will be higher than previously anticipated."

Accordingly, the U.S. 2-year Treasury yield closed at 4.7138% on the 3rd (local time), up 9 basis points from the previous day, marking another yearly high. Analysts interpret this as reflecting the Fed’s rate hike cycle of 'higher for longer.' Park Sang-hyun, a researcher at Hi Investment & Securities, said, "The seesaw game between inflationary pressures and government bond yields is expected to continue, so it is time to be cautious about the risk of further increases in market interest rates."

Although the government started operating the bond stabilization fund last week and is initially releasing 1.6 trillion won of unexecuted funds secured in 2020 to purchase mainly CP, the bond market remains unstable. According to the Korea Financial Investment Association, while the final bid yields of most bonds except CP and CD declined on the 1st, they have been rising again since the 2nd.

However, some believe that since U.S. inflation has peaked, Powell’s remarks on prolonged tightening may be difficult to realize, and the bond market is expected to stabilize soon. Han Kwang-ryeol, a researcher at NH Investment & Securities, said, "Considering that U.S. inflation has peaked and is declining, bond yields are likely to slow down after the first half of next year," adding, "Although bond yields may rise slightly for a while since they peaked last month and are now declining, they will show a stable trend."

Meanwhile, the Financial Services Commission held a meeting chaired by Vice Chairman Kim So-young on the same day to review the current status of the financial market following the U.S. giant step. The meeting checked the implementation status of liquidity support measures exceeding 50 trillion won announced by the government last month.

The government plans to start purchasing corporate bonds that are difficult for the market to absorb this week and complete the first additional capital call. Also, Korea Securities Finance will supply about 1 trillion won to small and medium-sized securities firms through repurchase agreements (RP) and loans, and the Korea Development Bank has expanded its purchases of corporate bonds and CP. Since the 1st, it has also been purchasing CP issued by securities firms. A Financial Services Commission official said, "Going forward, the bond stabilization fund, Korea Securities Finance, and the Korea Development Bank’s corporate bond and CP programs will be operated more flexibly and actively to enhance market response capabilities."

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