Korean and US Bond Yields on an Uptrend
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
No need for US Fed to consider a 75bp rate hike yet
Both Korean and US bond yields are on an uptrend. In May, 3Y and 10Y KTB yields surged by 18.5bpeach, and 2Y and 10Y US Treasury yields increased by 2bp and 23bp, respectively. Monetary policy tightening amid heightened inflationary pressure has been witnessed in both countries. Korea’s consumer price index for April jumped 4.8% YoY, marking the largest increase since October 2008. Given that inflation expectations have exceeded 3% levels, the Bank of Korea is more likely to carry out further rate hikes in May. Against this backdrop, both short-and long-term KTB yields have risen sharply.
As for US Treasuries, long-term yields climbed at a relatively faster pace than short-term yields. The US Fed dismissed the likelihood of a 75bp rate hike at the May FOMC meeting, but mentioned that it could take additional big steps in the coming months, confirming its positive outlook on current economic conditions and commitment to curb high inflation. It is difficult to predict the impacts of a 75bp rate hike. In mid-April, concerns over a possible 75bp hike have caused a sharp correction in stocks and stoked fears of a looming economic slowdown. In addition, bear steepening occurred as the issuance of medium-term bonds of two to seven years will be reduced more sharply compared to long-term bonds of over ten years for the next quarter.
After the release of the US jobs report for April, there has been a growing consensus that the Fed’s expectations for near-term price stabilization may be overly optimistic. The US added 428,000 jobs in April, but labor force participation fell to 62.2% from 62.4% in March. Amid the slow return of workers to the labor force, robust demand for labor raises fears that higher wages will drive up inflation. High prices may persist for a longer period than the Fed anticipates. This will trigger the central bank to adopt tougher tightening measures.