Fixed Income Monthly: Change in Tone at Both Fed and BOK

The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed. 

Having undergone a tantrum in October, the KTB market stabilized rapidly in November. Concerns over punitive rate hikes will likely ease in that the BOK’s focus has shifted from accumulated financial imbalances back towards economic conditions. KTB yields should continue to stabilize downwards in December.

BOK’s tone changing: Now economy is being emphasized again

At its November meeting, the BOK put economic conditions back on the front burner, no longer pointing to accumulation of financial imbalances as being the most pressing issue. With both the housing price CSI indicator and the housing price weekly growth rate having peaked out, the BOK’s change in stance looks likely to sustain, and concerns towards a ‘punitive’ rate hike should ease.

Expectations intact towards long-term decline in KTB yield 

A lesson taken from 2009~2011 is that if there is a combination of a benchmark rate hike and a narrowing in the GDP gap following an economic downturn, KTB long-term yield trends downward. The BOK has already boosted its base rate twice, and another hike is likely in Jan 2022. Moreover, we expect Korea’s GDP gap to shrink from 1.9%p in 2021 to 0.7%p in 2022. Noting such, we continue to suggest long-term KTBs, believing that yields will continue to fall.

Despite Omicron, Fed’s early tightening noise to continue

The Fed is unlikely to announce an acceleration of tapering at the upcoming December FOMC. However, internally, members are expected to discuss a faster pace, and the capacity to respond to inflation will likely be emphasized. Accordingly, concerns over early tightening are to remain in play. Further stoking uncertainties is the designation of Omicron as a VOC. That said, at the time the previous VOC (ie, the Delta variant) emerged, no significant policy change was made at the June FOMC despite the designations of the WHO (May 10) and CDC (Jun 22). Economic conditions still outweigh Omicron risks.