According to the Korea Financial Investment Association on the 27th, the three-year government bond yield stood at 3.492% a year. The 10-year yield ended at 3.820%. That is up 53.9 basis points and 43.5 basis points, respectively, from the end of last year (1 basis point equals 0.01 percentage point). After WGBI inclusion on the 1st sent yields down more than 20 basis points in a single day, the market has since reversed much of that drop.
The rebound reflects renewed worries about an oil-driven inflation shock as countries continue to spar over a ceasefire in the Middle East. The WGBI factor has not been enough to keep yields down. Finance Ministry data showed foreigners posted net purchases of 8.5 trillion won in Korean Treasury bonds over about three weeks after April’s WGBI inclusion, well above the usual average of 4.5 trillion won. Even so, yields have not returned to prewar levels — the 3.0% range for three-year bonds and the 3.5% range for 10-year bonds.
Kiwoom Securities, citing China’s earlier WGBI inclusion, said index entry can broaden demand but does not necessarily drive yields lower on its own. Economic conditions and policy responses, it said, have a larger influence on rates.
Expectations for additional policy tightening are also pushing yields higher. With the policy rate at 2.5%, the three-year government bond yield is nearly 1 percentage point above it. Because the three-year tenor typically reflects expectations for the policy path most sensitively, the market is pricing in the possibility that the Bank of Korea could raise rates at least twice more. Increased government bond supply is adding to the upward pressure.
Higher government bond yields can spill into the real economy because they serve as benchmark rates for market borrowing costs. When they rise, corporate bond yields and bank lending rates can follow.
Corporate financing conditions have already worsened. The yield on three-year AA- rated corporate bonds rose to 4.147% from 3.476% at the end of last year. Smaller companies with weaker credit could face a sharper squeeze, including difficulty raising funds. Households are also exposed: if bank loan rates move higher in line with government bond yields and the COFIX funding rate, borrowing costs for vulnerable borrowers could approach their limits.
Prospects for Bank of Korea rate hikes have strengthened after first-quarter gross domestic product growth delivered a surprise that far exceeded market expectations. With Middle East-driven inflation risks already elevated, analysts say stronger-than-expected growth could add to price pressure and lead the central bank to place greater weight on inflation control when setting policy.
Cho Yong-gu, a researcher at Shinyoung Securities, said, “With the domestic first-quarter GDP surprise, the terminal rate is now more likely to reach 3.00%,” and forecast an upward revision to the ‘K-dot plot’ in May, a minority dissent for a hike in July, and a 25-basis-point increase in August.
* This article has been translated by AI.
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