S.Korean treasury yields top base rate on hawkish BOK

South Korea’s three-year treasury bond yield topped the base rate for the first time in two months, after the Bank of Korea (BOK) warned against bets on its switch into a monetary easing stance.

Yields on three-year government bonds rose 4.4 basis points (bps) to close at 3.524% on Friday, above the base rate of 3.50%, which the central bank left unchanged on Thursday.

After the rate-setting meeting, BOK Governor Rhee Chang-yong said in a press conference that there is room for the central bank to raise the policy rate to 3.75% and it is too early to discuss starting to cut interest rates.

He cited the Australian central bank’s unexpected rate hike this month and said: “There is no reason for South Korea not to follow suit.”

In immediate response to Rhee’s hawkish comments, the three-year treasury bond yield soared 10.2 bps to end at 3.48% on Thursday, according to the Korea Financial Investment Association.

Yields on the most-liquid government bonds tend to trade at about 20 to 30 bps higher than the central bank’s base rate.

Being traded below the policy rate meant that bond investors were betting that the BOK was done with its one-and-a-half-year tightening and would switch to a rate cut.

Other maturity bonds ranging from two years to 20 and 50 years are quoted above the base rate of 3.50% as well.

The yield gains also reflected concerns about the impact of drawn-out negotiations over the US debt ceiling increase 

The bond market also showed a negative response to talk of a supplementary budget, which could lead to new government bond issues.

President Yoon Suk Yeol’s senior economic secretary Choi Sang-mok said on Thursday ahead of the rate-setting meeting that an extra government budget may need to be discussed.

Write to Jin-Gyu Kang at josep@hankyung.com

Yeonhee Kim edited this article.