Possible Lowered Key Rate
The Korean treasury bond rate hit a new low with Japan adopting its first negative interest rate and investors preferring risk-free assets. An increasing number of market participants are predicting that the Bank of Korea will cut the key interest rate within the first half of this year as the treasury bond rate has become even closer to the benchmark rate.
On February 2, the three-year treasury bond rate declined by 0.009 percentage points from the previous day to 1.516%, just 0.016 percentage points higher than the benchmark rate. The five-year and 10-year rates dropped 0.005 percentage points and 0.006 percentage points to 1.640% and 1.916%, respectively. Likewise, the 20-year and 30-year rates reached new lows of 2.027% and 2.054%. Experts are pointing out that the three-year rate could drop to 1.50% in the near future.
“Earlier, concerns over foreign fund outflow attributable to the Fed’s interest rate hike, a smaller difference between long- and short-term interest rates and the like used to curb a drop in treasury bond rate,” Eugene Investment & Securities explained, continuing, “However, the central banks of developed countries are resorting back to easy-money policies this year due to the slowdown of the Chinese economy, large-scale industrial restructuring in China, global economic and financial uncertainties rooted in plunging oil prices, etc.”. It added, “Under the circumstances, emerging countries can have more monetary leeway and the central bank of Korea can be tempted to reduce the benchmark rate.”
The recent drop in treasury bond rate can be attributed to the significant drop in Korea’s exports that was witnessed last month, too. Specifically, the monthly exports fell 18.5% year on year to US$36.7 billion and showed the largest decrement since August 2009, when the rate of decrease had amounted to 20.9%. This is causing investors to prefer risk-free assets and a key rate cut in the first half of this year to become more and more likely. The rate was lowered by a quarter of a percentage point to 1.5% in June last year and has remained the same since then.