Impact of US’s Key Rate Increasing
As the US raised recently the key rate by 0.25 percent points and South Korea and the United States are seeing a reversal of interest rates for the first time in 10 years, all eyes are on how it will affect bond interest rates in the market. Most experts believe the interest rates on domestic bonds will not fluctuate because the increase in U.S.’ policy rates is already reflected in.
Currently, the key rates of the U.S. stand at 1.50 to 1.75 percent, higher than the South Korean rate of 1.5 percent. In fact, the interest rates of Korean government bonds fell in unison on March 22 as uncertainties have been removed.
According to the bond information center at the Korea Financial Investment Association (KOFIA), the yield of the three-year government bond was down 3.5 basis points to 2.256 on the 22nd and that of the one-year and the five-year government bond fell 0.6 basis points and 2.8 basis points, respectively. The yield of the 10-year and the 20-year government bond dropped 2.9 basis points and 1 basis point, while that of the 30-year and the 50-year government bonds decreased 0.9 basis point and 1.4 basis points, respectively.
Lee Mi-sun, a senior researcher at Hana Financial Investment, said, “The market already expected a reversal of key rates between South Korea and the U.S. So, it will have little impact on the South Korean bond market.”
However, she suggested that bond yields can increase in the second half of the year. Lee said, “The U.S. Federal Open Market Committee (FOMC) officials said they would raise its key interest rates three times this year but the FOMC can raise the number to four in June.” Therefore, there will be growing feelings of wariness in the market, according to Lee.
Kim Soo-hyun, a researcher at KB Securities, said, “After the FOMC ended its meetings in March, one of the factors that bring about uncertainties in the bond market has removed. However, there are still variables that can affect the bond market. It is hard to say all the uncertainties have been completely ironed out.”
There is a consensus among experts that capital is most unlikely to leave from South Korea despite a reversal key rates between South Korea and the U.S. the market paid attention to the fact that there were no meaningful funds outflow both in 2001 and 2006 when the two countries saw a reversal of interest rates.
William Palmer, an investment manager at Baring Asset Management, said, “When emerging countries see a current account deficit compared to other regions, they will be adversely affected by the increase of the U.S. key rates. However, the emerging markets are already experiencing a current account surplus.” In short, he implied that there is no need to worry about capital outflow from South Korea.
Shin Dong-suk, head of Samsung Securities’ research center, also said, “South Korea is continuously seeing its current account surplus exceeding 5 percent of its GDP. Considering there was two reversals of interest rates between South Korea and the U.S. after 2000, there is a very limited possibility of foreign capital outflow from South Korea due to a reversal of interest rates of 25 basis points.”