Conservative Approach Needed
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
We are seeing bear-flattening yield curves in bond markets, with yields rising by 24bp since the start of June to YTD highs of 3.3% for 3Y KTBs and by 16bp to 3.5% for 10Y KTBs. Bank of Korea (BOK) and major central banks are tightening their monetary policies to rein in inflation, causing bond yields to continue upward at home and abroad. Meanwhile, inflationary pressure is remaining high, with the US Consumer Price Index (CPI) recording its largest hike in 41 years at a 12-month gain of 8.6% in May.
Market expectations for the year-end Fed funds rate had previously eased down to 2.6% from 3% levels following comments by the Atlanta Fed president on a possible pause in rate hikes in September, leading to a dip in 10Y US Treasury yields to 2.75%. However, Fed Vice Chair Lael Brainard’s recent remarks, made right before the start of the blackout period preceding the June FOMC meeting, and the release of US CPI data for May resulted in shifting the consensus from a pause in September to a rate hike of 75bp. Market expectations for the Fed funds rate at end-2022 now exceeds 3.25%, pointing toward at least one 75bp hike within the remainder of the year.
Bond market focus will be on the June FOMC meeting, with a 50bp rate rise likelier than a 75bp hike but hawkish comments expected from Fed chair Jerome Powell in light of continuing inflation. As rising uncertainties in US monetary policies will likely weigh on domestic bond market sentiment, we recommend taking a conservative approach while waiting to confirm US bond market reaction to June FOMC meeting results. This week, we expect to see a yield band of 3.24-3.40% for 3Y KTBs and 3.43-3.62% for 10Y KTBs. The 3Y-10Y yield spread should move within 19-22bp.