Government bond yields, which surged due to concerns over additional tightening by the United States, paused for breath after a day. While the supply conditions, including the government's adjustment of bond issuance and inflows of foreign bond investments, remain favorable, anxiety in the domestic bond market persists due to rising expectations of interest rate hikes by the U.S. Federal Reserve.
According to the Korea Financial Investment Association on November 12, the yield on the 3-year government bond closed unchanged at 3.729%. The 10-year bond yield fell by 1.3 basis points to 3.937%, while the 5-year bond yield decreased by 0.7 basis points to 3.803%. In contrast, the 2-year and 20-year bonds saw slight increases of 0.1 and 0.2 basis points, respectively, reflecting mixed trends across maturities.
The previous day, government bond yields had surged across the board, with the 3-year yield rising by 9.6 basis points and the 10-year yield jumping by 10.0 basis points. This spike was attributed to stronger-than-expected inflation pressures in the U.S., highlighting the possibility of aggressive tightening by the Federal Reserve. The easing of some of the burden from the previous day's surge is seen as a reason for the stabilization in yields.
The domestic bond supply conditions are relatively favorable. The government has adjusted its bond issuance for November to 12 trillion won, reducing it by 5 trillion won from the initial plan. This reduction in bond issuance alleviates supply pressures, which is conducive to lower yields.
Foreign investors are also re-entering the domestic bond market. According to the Bank of Korea's report on international finance and foreign exchange market trends, foreign investment in domestic bonds saw a net inflow of $5.61 billion last month. This marks a shift from three consecutive months of outflows to a net inflow for the first time in four months. The Bank of Korea attributed this change to inflows from funds tracking the World Government Bond Index (WGBI) and improved incentives for short-term arbitrage trading.
However, uncertainties surrounding U.S. monetary policy may limit further declines in government bond yields. The U.S. Consumer Price Index (CPI) for October rose by 0.4% from the previous month, while core CPI increased by 0.3%, both exceeding market expectations. Continued inflation pressures have led to hawkish comments from Federal Reserve officials.
According to the CME FedWatch Tool, the probability of the Federal Reserve raising the benchmark interest rate by 0.25 percentage points in December has increased from 66.9% a week ago to 90.8% today. Some Federal Reserve officials have even mentioned the possibility of a 0.50 percentage point increase, heightening market concerns about tightening.
The direction of the Bank of Korea's monetary policy is also a variable to consider. After consecutive rate hikes in July and August, the Bank of Korea held the rate steady at 3.00% in October. With uncertainty surrounding the possibility of further increases ahead of the monetary policy committee meeting on the 26th, analysts suggest that the potential for declines in government bond yields may be limited.
Particularly, if U.S. Treasury yields rise again, it could alter the trading patterns of foreign investors in government bond futures, exerting upward pressure on domestic yields. The recent strength in the domestic bond market, supported by foreign investment, may fluctuate in response to external interest rate movements.
Woo Yu-seung, a researcher at SK Securities, stated, "U.S. Treasury yields are expected to face upward pressure for both short- and long-term maturities until the end of the year. The recent strength in government bond yields has been driven by foreign investment, but changes in foreign demand for government bond futures due to external rate fluctuations could lead to increased upward pressure on yields."
* This article has been translated by AI.
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