Dovish BOK Hike to Be Offset by US TB Yield Rise
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
Foreign demand and policy failure bets, the key cause of muted US TB yield response in end-2021, will likely fade out in January. On the other hand, KTB yields will likely fluctuate at current level as uncertainties about additional hikes will persist even after BOK enacts a January hike.
Foreign demand and policy failure drove muted US TB yield response
US TB yield’s muted response to Fed’s stronger hawkish stance was driven by 1) favorable foreign demand and 2) policy failure concerns. However, since August the proportion of indirect bidders' bids has steadily decreased to below 70%, meaning foreign demand has already peaked out. Also, noting tapering effects and reverse repo expansion, yield downward pressure from supply-demand issues will weaken.
US TB yield upward pressure to dominate in January
Although Omicron cases are increasing rapidly, US has not strengthened containment measures, unlike Europe. Also, amid a rebound in economic surprise index, employment recovery will likely accelerate with the end of child tax credit advance payments, which were an important component of a household’s cash buffer. Concerns over policy failure will likely dissipate as well. As the drivers of US TB yield’s muted response change course, US TB long-term yield will face upward pressure in January.
Dovish BOK hike to be offset by US TB yield rise
We expect BOK to raise the benchmark rate at the January MPC meeting. We note that amid lingering concerns over an economic slowdown (such as PBoC likely to come up with additional easing policies in January), stronger social distancing measures is also a burden on the economy. As such, at least one MPC member will vote for a rate freeze and the continuity of the rate hike cycle will remain uncertain. However, KTB market has already priced in such notions. Rather, KTB yields will take a breather, focusing on US TB yield uptrend and supplementary budget issues. Should KTB yields rise, we maintain our buy recommendation, but there is no need to rush at this juncture.