The continuous decline in the interest rates on bonds is slowing down. The downward trend let up after the Bank of Korea (BOK) decided to freeze the benchmark rate at the end of last month. Market experts expect that the BOK is highly likely to lower the benchmark rate in October, but the decline in bond yields will slow down due to surging bond prices and an increase in bond supply.
The interest rates on South Korea’s 3-year and 10-year government bonds closed at 1.168 percent and 1.276 percent on Aug. 30, up 0.1 basis points and 2.8 basis points from the previous day, according to the Korea Financial Investment Association (KFIA) on Sept. 1. This was because the bond prices fell as the BOK’s Monetary Policy Committee froze the key interest rate at 1.5 percent on Aug. 30. Bond market bulls seem to be taking a breather. The decline in the interest rate on 3-year Treasury bonds stood at 14.1 basis points in August, down from 18.7 basis points in July. In particular, the figure rebounded by 7.6 basis points and 4.7 basis points on the third and the fourth week in August.
Experts attributed it to a rapidly growing burden on bond prices. Demand for bonds, which are risk free assets, has greatly increased as the intensifying trade dispute between the United States and China has made the global financial market unstable and there is growing concern over the economic depression at home and abroad. As a result, interest rates on bonds showed an unprecedented fall and the figure on 3-year government bonds dropped to some 1 percent.
Bond supply and demand is also another factor that puts the brakes on the decline in the interest rates on bonds. Previously, Korea Housing Finance Corp. failed to attract enough investors for its mortgage-backed securities (MBS) and the size of bond issuance was expected to rise next year. Consequently, bonds sunk in price at the end of last month. Given the circumstances, foreign investors net sold 1.80 trillion won (US$1.48 billion) worth of won-denominated bonds on Aug. 27 alone.
Market experts said the BOK will lower the benchmark rate in October because two members of the Monetary Policy Committee demanded the reduction in interest rates in August and the BOK is likely to ease the monetary policy to deal with the economic slowdown in South Korea.
Despite the fact, many still predict that the decrease in the interest rate on bonds will slow down further for a while. This is largely due to the fact that the market expectations that the benchmark rate will be lowered two more times in the future get somewhat ahead of the move by monetary authorities.