The yield on South Korea’s three-year treasuries closed at 2.978% after hitting 2.979 at one point on July 29, 2024
South Korea’s treasury bond yields fell to their lowest points in more than two years, breaching below the 3% level for the first time since April 2022 as the unexpected economic slowdown in Asia’s No. 4 economy in the second quarter bolstered expectations of at least two interest rate cuts within the year.
The yield on South Korea’s benchmark three-year treasuries hit 2.978% by the market close on Monday, down 0.046 percentage point, compared with Friday’s finish. It marked the first time the treasury yield slid to the 2% level since May 30, 2022 when it touched 2.942%.
Five-year treasury yields also dropped to the 2% level for the first time since scraping 2.942% on April 1, 2022. Its yield inched down 0.055 percentage point to close at 2.990% on Monday.
The government bond market has priced in two rates cuts each by 25 basis points within the year, after the Bank of Korea kept its base rate at 3.50% for 18 months in a row this month.
(Graphics by Dongbeom Yun)
Treasury yields have been on a downward spiral since April, after hovering around the base rate of 3.50% between November 2023 and March of this year.
Foreign investors led the bond market rally. They have scooped up a net 4.2 trillion won ($3.0 billion) worth of Korean government bonds so far this month following their net purchase of 4.48 trillion won last month, according to the Korea Financial Investment Association.
S.KOREA’S ECONOMIC SLOWDOWN
The decline in domestic government bond yields tracked the US Treasury moves.
Traders are now 100% certain about a US interest rate cut in September after data showed the US inflation eased in June. The yield on US 10-year Treasuries edged down 0.048 percentage point at 4.195% as of last weekend.
A slowdown in the South Korean economy reinforced expectations that the country’s central bank would follow suit with a rate cut in October. The country’s gross domestic product contracted 0.2% in the second quarter from three months before, snapping the five-quarter growth stream.
After the July rate meeting earlier this month, Bank of Korea Governor Rhee Chang-yong said the time was ripe to prepare an interest rate cut as consumer prices were holding around its target of 2%.
But he remained cautioned about the timing of a rate move, citing household debt growth, rising house prices and the softer Korean won.
Bank of Korea Governor Rhee Chang-yong (center) presides over a monthly rate-setting meeting
UPGRADE TO DEVELOPED MARKET STATUS?
Some bond analysts said the domestic bond market rally seemed to reflect foreign investors’ bets on a long-awaited inclusion of South Korea the inclusion into a developed bond market status.
In March this year, FTSE Russell, the global index subsidiary of London Stock Exchange Group, kept South Korea on the watch list for potential inclusion in its FTSE World Government Bond Index (WGBI).
However, a BOK official warned the bond market was overshot.
“Considering the views among the monetary policy board members, market expectations (for an imminent rate cut) were overdone,” said a BOK official. “There are many variables that could play against market expectations.”
Ahn Jae-kyun, a fixed-income strategist at Shinhan Investment & Securities, said that a rise in public service prices due for the second half of this year would add to inflationary pressure and thus, the fall in treasury bond yields below 2% would be short-lived.
“Korean bond dealers don’t’ feel like buying three-year treasuries below 3.1%,” said a fixed-income trader. “It looks like only foreigners are buying (Korean) treasuries.”
On Tuesday, the three-year treasury yield closed morning trade at 2.988%, up 0.010 percentage point from Monday’s finish.
The yield on five-year treasury notes added 0.009 percentage point to 2.999% by midday.
By Jin-Gyu Kang and Hyun-Il Lee
joseph@hankyung.com
Yeonhee Kim edited this article
