"Post-Kimtongwi Supply Pressure Limits Bond Yield Strength... Conservative Investment Recommended"

The Bank of Korea is expected to maintain a principled stance on the possibility of further rate cuts in the future, even if it lowers the base interest rate and economic growth forecast at this month's Monetary Policy Committee (MPC) meeting. Considering the full-scale issuance of government bonds, it is analyzed that the strength of bond yields will be limited for the time being. A conservative approach is recommended for bond investment in the short term, especially in March.

Yu Sang-young, a researcher at Korea Investment & Securities, stated in his report titled "The Burden of Increased Supply to Intensify After the MPC" on the 18th, "Ahead of the domestic monetary policy gap in March, the reduced expectations for a base rate cut and the full-scale issuance of government bonds in 2025 will put pressure on government bond yields."

First, Researcher Yu predicted that the MPC scheduled for the 25th will implement a 0.25 percentage point cut in the base interest rate and lower the growth forecast. He also anticipated that the Bank of Korea will confirm a principled stance of flexible response to the possibility of additional rate cuts depending on economic indicators. He explained, "Since March is a month without a monetary policy direction meeting to decide interest rates, considerations for financial stability such as exchange rates will inevitably be significant. From the Bank of Korea’s perspective, market expectations leaning toward rate cuts during the policy gap period would be a major burden."

Accordingly, market attention is likely to shift from monetary policy to government bond supply and demand. Researcher Yu noted that the Ministry of Economy and Finance confirmed the total government bond issuance limit for 2025 at KRW 197.6 trillion and the net issuance limit at KRW 80 trillion at the end of last year, both increased from the previous year, and that additional supplementary budgets (chugyeong) are being proposed in the political arena. He assessed, "The burden of government bond issuance in 2025 will inevitably increase." While he mentioned that a significant portion of the supplementary budget has already been priced into current government bond yields, he analyzed that these factors will limit the strength of bond yields.

Researcher Yu recommended, "With the ongoing burden of government bond issuance and some adjustment in expectations for rate cuts after the February MPC, a conservative approach is valid in the short term, especially in March. For 3-year bonds, assuming a base rate of 2.5%, a buying strategy near 2.7% yields is effective." He added, "For 10-year bonds, if the supplementary budget size exceeds the initially expected market range of KRW 20 to 30 trillion, there is a high possibility of some downward pressure. Depending on the finalized supplementary budget size, yields could rise up to 3.0%, but approaching purchases at levels above 2.9% would offer a favorable risk-return ratio."

Meanwhile, last week, the 3-year government bond yield fell by 3.7 basis points (1bp = 0.01 percentage points) compared to the previous week, while the 10-year bond yield rose by 0.6 basis points. The spread between the 3-year and 10-year government bond yields widened from 19.5 basis points to 23.8 basis points.

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