KTB Yields Seem to Be in 'Overshoot Territory'
The author is an analyst of KB Securities. He can be reached at jk.lim@kbfg.com. -- Ed.
Lower weight in 3y KTBs, raise weight in long-term KTBs (10y or longer)
KTB yields, which had been stabilizing, have rebounded, edging near their previous peaks. During the Jackson Hole Economic Symposium, Fed Chair Jerome Powell extinguished hope for rate cuts in 2023. He stated that price stability is the responsibility of the Fed and that it “must keep at it until the job is done” despite “unfortunate costs of reducing inflation.” The Korean bond market, however, was more keen in responding to comments made by BoK governor Rhee Chang-yong, who also attended the symposium. He stated that Korea’s rate hikes are unlikely to end before those of the Fed, which led to market speculation that Korea’s base rate could reach as high as 3.5%. KTB yields should remain volatile given (1) lack of institutional investments in the bond market (due to an extended slump), (2) KRW depreciation and (3) the Fed doubling QT efforts starting in September.
KTB yields seem to be in “overshoot territory.” Rate cuts are unlikely until inflation retreats, so we continue to recommend reducing weight in 3y KTBs but advise slowly purchasing long-term KTBs (10y or longer) should yields exceed previous peaks. A base rate higher than the rate implied mid-June must be priced in for KTB yields to surpass previous peaks; the 1y KTB forward rate currently assumes a base rate of 3.5% (vs. 4.0% in mid-June). The 10y KTB yield is approaching its previous peak, but 10y treasury bond yields in other countries (excl. the U.K., which has price outlooks significantly raised based on energy prices, Brexit) remain well below. Long-term KTB yields should gradually reflect growing recession concerns, as a slowing U.S. economy will have a detrimental impact on the Korean economy. Moreover, Korea’s rate hikes are raising the interest burden, which is bound to undermine real spending power.