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Korea benchmark bond yield near 2-1/2-year high

The three-year treasury bond yield rises to highest since May 2019, five- and 10-year yields strongest since late 2018

By Oct 06, 2021 (Gmt+09:00)

Korea benchmark bond yield near 2-1/2-year high

South Korea’s benchmark bond yield hit the highest level in about two and a half years as expectations of tighter monetary policies at home and abroad, as well as worries about China soured sentiment in the local debt market.

The most liquid three-year Korean treasury bond yield rose on Oct. 5 to 1.65%, the strongest since May 28, 2019, according to the Korea Financial Investment Association. The five- and 10-year government bond yields also jumped to 1.989% and 2.291%, respectively, their highest levels since December and November 2018.

The US Federal Reserve is expected to take more aggressive steps to temper inflation, while the Bank of Korea is also predicted to raise interest rates further.

In addition, concerns grew over accelerating inflation caused by China due to power outages and surging commodity prices amid worries about debt crisis  involving Chinese real estate developer Evergrande Group. Some saw risks of a global stagflation – rising inflation with slowing growth.

The local corporate bond market also suffered with yields rising. Companies with ratings below AA failed to meet targets of bond sales, while investment demand for bonds with healthy ratings shrank compared to the first half.

LONG-TERM INTEREST RATES UNLIKELY TO RISE FURTHER

Domestic brokerage houses, however, expected rises in market interest rates, especially long-term ones, to be limited.

NH Investment & Securities predicted long-term interest rates may fall as growth in Asia’s fourth-largest economy was likely to slow down with excessive interest rate hikes given economic fundamental.

“Borrowing costs rose to this year’s highs on growing expectations that the Bank of Korea will raise interest rates to up to 1.5%. But the significant top of the 10-year treasury bond yield is 2.2%,” the brokerage house said in a recent report.

A long-term interest rate usually reflects economic growth, so it is unlikely to stay above a potential growth rate for a long term, it said. The Bank of Korea estimated the country’s 2021-22 potential growth at 2%.

DB Financial Investment Co. also said risks of deflation – low inflation with slowing growth – are larger than stagflation.

“The recent concerns over stagflation is based on expectations of a damage to confidence in the dollar,” it said. “But considering suggestion on US tightening, the dollar will be stronger. Given the recent weakness in gold prices, worries about stagflation is nonsense.”

Write to Hyun-Il Lee at hiuneal@hankyung.com

Jongwoo Cheon edited this article.

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