Betting on Interest Rate Cuts? Buying Bonds in Portions Every Time Interest Rates Rise

End of Tightening Phase... Base Interest Rate Expected to Remain at Current Level for Now
Rate Cuts Likely Only After Second Half of Next Year... Inflation and Economic Indicators to Have Significant Impact

Going forward, the domestic bond market is expected to respond more sensitively to U.S. inflation trends than to monetary policy. This is because the tightening stance has effectively ended, and the benchmark interest rate is expected to remain at its current level for a considerable period. Economic indicators such as inflation slowing down are likely to have a greater impact on further declines in bond yields (further increases in bond prices).

According to the Korea Financial Investment Association, on the 30th of last month, the 3-year Treasury bond yield closed at 3.583%, up 2.9 basis points (1bp = 0.01 percentage points) from the previous trading day. The 3-year bond yield fell during the morning session when the Bank of Korea's Monetary Policy Committee met but turned upward in the afternoon. The 10-year bond yield ended at 3.699%, up 5.8 basis points. The domestic bond market reversed into a bull market since mid-November. The major segments of Treasury bond yields have fallen by 50 to 80 basis points from their six-month highs.

The bond market is expected to weigh economic indicators more heavily than monetary policy. This judgment is based on the lack of factors to extend the recent sharp decline in yields from a monetary policy perspective. This was also evident in the Monetary Policy Committee meeting. Lee Chang-yong, Governor of the Bank of Korea, stated at a press conference after the meeting that the tightening period would "realistically be longer than six months." This means the current benchmark interest rate (3.50%) will be maintained for at least six months. He added, "I expect the inflation rate to converge to 2% by the end of next year or early 2025," and "I think it will reach 2% faster than the U.S." Taken together, this implies no possibility of further rate hikes, and rate cuts are unlikely before the second half of 2024.

The bond market is particularly focused on inflation among economic indicators. The U.S. Consumer Price Index (CPI) for October rose 3.2% year-on-year, which was below both September's increase (3.7%) and market expectations (3.3%). Amid this, if U.S. inflation turns negative month-on-month in November, there is analysis that U.S. bond yields will fall further. Currently, the 10-year U.S. Treasury yield is below 4.2%.

Myungshil Kim, a researcher at Hi Investment & Securities, explained, "If the inflation rate records a negative month-on-month figure, it proves that U.S. inflation is approaching the Federal Reserve's target," adding, "Expectations for discussions on rate cuts can intensify." He further said, "Considering the synchronization phenomenon between the domestic and U.S. bond markets, the domestic bond market is also expected to show a similar trend," and "Conversely, if inflation diverges from the Fed's target, a 'bull market speed control theory' may arise, so domestic bond yields are likely to remain stable at current levels, combined with sluggish year-end trading volume."

Therefore, rather than actively investing in anticipation of rate cuts, it is analyzed that it is advantageous to make staggered purchases whenever yields rise. Jiman Kim, a researcher at Samsung Securities, also advised, "Since January, when the benchmark rate was maintained at 3.5%, the averages for 3-year and 10-year Treasury bonds were 3.59% and 3.67%, respectively, and currently, yields are again below those average levels, suggesting that the recent short-term decline in yields may have been excessive," adding, "Considering that more than half a year remains until the timing of rate cuts, a strategy of responding with purchases during yield increases rather than chasing yield declines is necessary."

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