Bank of Korea's Outright Purchases and Easing Oil Prices Lead to Broad Decline in Government Bond Yields

On the morning of March 10, government bond yields, which had surged due to the sharp rise in international oil prices, generally trended downward. This followed signs of intervention by authorities, including the Bank of Korea’s decision to conduct outright purchases of government bonds. In addition, international oil prices fell below $100 per barrel overnight.

3-year yield at 3.303% intraday... Downward trend except for 2-year bond

In the Seoul bond market that morning, the yield on the benchmark 3-year government bond, which serves as a key market rate indicator, recorded 3.303% per annum, down 11.7 basis points (1bp = 0.01 percentage point) from the previous trading day. The yield had jumped to 3.42% the previous day, hitting its highest level since June 2024, but has now reversed much of that increase. At the same time, the yield on the 10-year government bond fell by 9.3 basis points to 3.646%. Except for the 2-year bond, yields on all maturities—1-year, 5-year, 20-year, and 30-year—declined. Falling bond yields indicate rising bond prices.

As a result, the spread between the Bank of Korea’s base rate (2.5%) and the 3-year government bond yield narrowed to around 80 basis points. This is a reduction from the previous day, when the spread had widened to its highest level since the Legoland crisis. However, the spread remains significant. Previously, Bank of Korea Governor Rhee Chang-yong noted at a press conference held after the Monetary Policy Board meeting at the end of February that the spread between the base rate and the 3-year government bond yield was excessive, mentioning '60bp' as a reference point.

Securities firms projected that the bond market would stabilize somewhat ahead of the session’s opening, thanks to the Bank of Korea’s outright purchases. The previous day, as international oil prices broke through the psychological resistance level of $100 per barrel and government bond yields soared across the board, fiscal authorities had verbally intervened during trading hours. This was followed by the Bank of Korea’s announcement, just after the close, of its plan to conduct outright purchases totaling 3 trillion won.

Yeha Ahn, a researcher at Kiwoom Securities, stated, “The purchased items include all benchmark issues and futures basket issues, indicating a policy decision focused on market stabilization. Given that this is the largest ever single-round outright purchase (a record 3 trillion won), market rates are highly likely to stabilize in the short term.” Jaegyun Lim, a researcher at KB Securities, also commented, “The Bank of Korea’s outright purchase suggests that, considering the current and future base rate trajectory, government bond yields have risen excessively. If yields continue to rise, not only the Bank of Korea but also the government may deploy financial market stabilization programs.”

The possibility of additional purchases by the Bank of Korea is also being raised. As of the end of last year, the Bank of Korea’s holdings represented 2.0% of the outstanding government bonds. Researcher Ahn explained, “In an environment without drastic tightening or loosening, the Bank of Korea’s outright purchases could increase its holdings to 2.5–2.6% of the total outstanding government bonds,” adding, “There is a possibility of purchasing around 7 trillion won in total.” This suggests that, in addition to the current 3 trillion won, further purchases of approximately 4 trillion won may be expected.

Furthermore, the overnight drop in international oil prices, closing at $94.77 per barrel for April West Texas Intermediate (WTI) futures, as major countries moved in concert, also exerted downward pressure on government bond yields. Comments by U.S. President Donald Trump in a CBS interview that “the war is almost over” and that the Iran situation may soon end provided additional relief to the markets. U.S. Treasury yields also declined.

The key going forward: energy variables... "Bond market volatility inevitable"

However, as witnessed in the previous day’s panic, energy variables are still regarded as the primary factor for the bond market. Researcher Ahn assessed, “Going forward, the bond market’s trajectory will likely be heavily influenced by the direction of international oil prices.” Researcher Lim added, “If geopolitical uncertainties are resolved, international oil prices could quickly stabilize at lower levels. However, until the war subsides, volatility in oil prices may persist, and, accordingly, volatility in the bond market will be inevitable.”

According to analysis by KB Securities, if WTI remains above $100 per barrel, the impact of rising gasoline and diesel prices on consumer inflation is estimated at an average of 1.33 percentage points from March to December. Should the government cut fuel taxes by up to 37%, the impact on inflation would be reduced to 0.93 percentage points, but upward pressure would remain. While Researcher Lim views the latest spike in international oil prices as a temporary factor, he cautioned, “If, due to base effects, Korean inflation rebounds in the second half of this year and international oil prices remain persistently high, the Bank of Korea may proceed with a rate hike within the year, as reflected in the swap market.”

Min Jihee, a researcher at Mirae Asset Securities, also stated, “If the Iran situation drags on, we cannot rule out a scenario where oil prices become entrenched at around $90 per barrel. In that case, inflation would soar into the 3% range, significantly exceeding 2%. Should inflation rebound into the 3% range and remain elevated, market vigilance over further bond yield increases could intensify.”

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