Short-term bond yield inches closer to base rate

By Son Ji-hyoung
  • Published : Dec 17, 2018 - 17:54
  • Updated : Dec 17, 2018 - 17:54

South Korea’s short-term sovereign bond yield has hovered just above the base rate, due to lingering market impact from the government’s plan to repurchase bonds before maturity and market uncertainties at home and abroad.

The three-year sovereign bond yield came to 1.795 percent at the Monday session’s close, showed data from the Korea Financial Investment Association. On Friday, the bond yield recorded its lowest figure since September 2017 at 1.781 percent.

The bond yield moves inversely with bond prices. A lower bond yield, or high bond price, signals investor appetite for safe assets. 

The bull bond market came in spite of a benchmark rate hike by the Bank of Korea in November to 1.75 percent, sparking market concerns about the economy downturn. If the three-year sovereign bond yield was lower than the base rate, it would mark the first time since August 2016.

This reflects market expectation that further monetary tightening in Korea is unlikely, Kong Dong-rak, a fixed income analyst at Daishin Securities, told The Korea Herald. But he added the rapid pace of bond yield drop last week is likely to become milder this week in the face of events such as a US monetary policy decision.

The five-year Treasury bond yield fell by 10 basis points to 1.886 percent. The 10-year state bond yield edged up 2 basis points to 2.004 percent.

Long-term state bond yields went slightly lower. The 20-year Treasury yield slid 6 basis points to 1.969 percent, while the 30-year sovereign yield inched down 4 basis points to 1.928 percent.

Meanwhile, investments in Korean bond funds came to a combined 23.1 trillion won ($20.4 billion) as of Friday, up 2.7 percent compared to that of end-September, according to data from market tracker FnGuide.

State-led plans to buy back sovereign bonds before maturity have “distorted the supply of short-term bonds,” wrote Shin Dong-soo, a fixed income analyst at Eugene Investment Securities, on Monday.

The Ministry of Economy and Finance and the Bank of Korea earlier jointly unveiled a plan to additionally buy back state bonds that mature next year, worth 3.4 trillion won, separately from the previously planned 4 trillion won worth of buybacks.

Shin added uncertainties in the monetary decision by the US Federal Open Market Committee are sparking concerns about market volatility.

“Regardless of whether the US Fed comes up with a dovish or hawkish decision, wider market volatility is inevitable in the bond market,” he wrote.

The downtrend in short-term bond yield is widening the credit spread of long-term debt securities, wrote Han Kwang-yeol, an analyst at NH Investment & Securities, meaning the difference in yield between sovereign bond and debt security with the same maturity but of lower quality has become larger.

By Son Ji-hyoung