"After Constitutional Court Impeachment Verdict... Bear Steepening Expected in Government Bond Yields"

Following the Constitutional Court’s impeachment verdict, expectations for a supplementary budget (extra budget) have increased, leading to analysis that a bear steepening trend-where long-term bond yields rise more sharply than short-term yields-could emerge in the bond market.

On March 18, Yoo Youngsang, a researcher at Korea Investment & Securities, analyzed the government bond market in a report titled "This Time, the Constitutional Court Over the Fed," stating, "If the impeachment situation concludes and political leadership is restored, more proactive fiscal policy is likely, resulting in a steepening trend in the second quarter."

Researcher Yoo predicted that the U.S. Federal Open Market Committee (FOMC) would keep its benchmark rate unchanged this week, adding, "Instead of providing clear forward guidance, the committee is likely to emphasize the need for further observation, so the impact on the government bond market will be relatively limited."

Instead, Yoo highlighted the resumption of discussions regarding a supplementary budget in Korea, as well as the inclusion of the phrase "slowing export growth" in the Ministry of Economy and Finance’s March economic trends report, reflecting overall concerns about the economic situation. He stated, "Since December, there has been a continued negative assessment of downward pressure on the economy. Now, the supplementary budget will become a policy constant, regardless of whether the impeachment is upheld or, in the event of an early presidential election, regardless of whether the current ruling or opposition party takes power."

Yoo added, "While it is true that the opposition party is more proactive about the supplementary budget, the presidential office also mentioned the fiscal role, including a supplementary budget, last November." He continued, "Once the impeachment situation is resolved and political leadership is restored, more active fiscal policy is expected." He further explained, "In the absence of political leadership, the amount of supplementary budget that the ruling and opposition parties can agree upon may be limited to within 20 trillion won. However, when the Constitutional Court delivers its impeachment verdict, expectations for a supplementary budget will grow further, leading to a dominant bear steepening trend in government bond yields."

Meanwhile, last week, yields on 3-year and 10-year government bonds rose by 2.2 basis points (1bp = 0.01 percentage point) and 5.3 basis points, respectively, compared to the previous week. As a result, the spread widened from 19.7 basis points to 22.8 basis points.

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