Key Policy Makers’ Cross Talks
The South Korean bond market fluctuated on Sept. 13 after Prime Minister Lee Nak-yeon made some remarks advocating an interest rate hike. Market insiders are expecting that the central bank will raise the benchmark rate in November.
According to the Korea Financial Investment Association, the three-year government bond yield closed at 1.921% on September 13 after rising 2.8 basis points from the previous day. The yield, which dropped to 1.89% on September 12 after news that the number of employed persons edged up a mere 3,000 in August, topped 1.9% in one day. Likewise, the 10-year government bond yield rose from 2.254% to 2.262%.
That day, the market was fluctuated by the prime minister’s remarks. He mentioned specific grounds for a benchmark rate increase, such as the interest rate gap between the United States and South Korea and household debts, and then net selling by foreigners soared. The three-year bond yield reached 1.951% in mid-trading.
However, the upward move halted after Deputy Prime Minister Kim Dong-yeon said that the remarks were theoretical.
“It seems that the government and the central bank reached a consensus that the low interest rate is the main culprit of skyrocketing house prices. They seem to share the view that an interest rate increase is inevitable,” Daishin Securities explained, adding, “Foreign investors increased net selling, betting that the rate hike can occur in November.”
The bond yields are likely to keep fluctuating for a couple of months. The short-term bond yield, which plummeted recently, can be stabilized if expectations for a benchmark rate increase rise again. Still, its effect is not lasting and the following increase in bond yield is likely to be limited. “If any, the interest rate adjustment in November is likely to be this year’s last one,” said NH Investment & Securities, adding, “Then, the interest gap will be further narrowed when it comes to 10-year bonds and those with shorter maturities and demands for long-term won-denominated bonds can increase.”