Despite the U.S. Consumer Price Index (CPI) for September exceeding market expectations, South Korea's government bond yields fell across the board. The decline in the domestic stock market, driven by fears of further tightening in the U.S., led to a flight to safety, with investors turning to relatively secure assets like bonds.
According to the Korea Financial Investment Association, the yield on three-year government bonds closed at 3.867%, down 1.6 basis points from the previous trading day. The yield on ten-year bonds also dropped by 6.8 basis points to 4.193%. Five-year and 20-year bond yields fell by 4.0 and 5.9 basis points, respectively, finishing at 4.007% and 4.237%.
Notably, the yield on 30-year government bonds decreased by 4.9 basis points to 4.289%, marking the lowest level since June 19 (4.259%). Foreign investors purchased 907 contracts of three-year treasury futures and 601 contracts of ten-year treasury futures.
The decline in domestic bond yields is attributed to risk aversion following a sharp drop in the stock market. On this day, the KOSPI index fell 7.57% to close at 5,554.22, triggering multiple trading halts due to heavy selling. This shift in investor sentiment away from riskier assets like stocks has led to increased demand for bonds.
A similar trend was observed in the U.S. Treasury market. The U.S. Department of Labor reported on October 14 that the September CPI rose 3.7% year-over-year, surpassing the market forecast of 3.6%. Core CPI, excluding food and energy, also increased by 2.6%, exceeding expectations of 2.5%.
The stronger-than-expected inflation pressures have raised concerns about further tightening by the Federal Reserve. Following the CPI announcement, the yield on two-year U.S. Treasuries surged from around 4.77% to 4.95%, while the yield on ten-year bonds jumped from 5.19% to 5.33%.
However, as U.S. stock markets declined, demand for safe-haven assets increased, leading to a reversal of the earlier yield increases. The two-year yield fell back to around 4.82%, and the ten-year yield dropped to approximately 5.20%. Subsequently, during Asian trading hours, U.S. Treasury yields continued to decline, impacting the domestic bond market.
In recent weeks, the decline in South Korean government bond yields has been supported by increased buying from foreign investors in treasury futures. The yield on three-year bonds has decreased from 4.119% on September 28 to 3.867% on this day, while the ten-year yield has fallen from 4.539% to 4.193% during the same period.
Market analysts suggest that the preference for safe assets due to stock market corrections and improvements in bond supply and demand could support further declines in yields. However, persistent inflation pressures in the U.S. and rising international oil prices may limit the extent of any further declines in domestic yields.
Im Jae-kyun, a researcher at KB Securities, noted in a report on October 13 that "a reduction in inflation concerns is necessary for yields to stabilize at lower levels than the current ones."
* This article has been translated by AI.
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