Treasury Bond Yields Surpass Base Rate Amid Foreign Selling… Three-Month Trading Range Broken

Expectations for Interest Rate Cuts in Both US and Korea Recede… 10-Year and 30-Year Yields Hit Annual Highs

Korean Bond Market [Produced by ChatGPT]

Treasury bond yields, which had been moving sideways for the past three months, have broken out of their trading range and risen, driven by aggressive net selling of futures by foreign investors.

The primary cause appears to be a simultaneous retreat in expectations for base interest rate cuts in both the United States and South Korea.

According to the financial information provider Yonhap Infomax on the 30th, foreign investors net sold 3-year treasury bond futures for six consecutive trading days, starting from the 22nd—immediately following the conclusion of the September Federal Open Market Committee (FOMC) meeting—through the previous day. Notably, on the 24th, they recorded their fifth-largest net selling volume in history (29,449 contracts).

On a monthly basis, foreign net selling of 3-year treasury futures this month reached 68,619 contracts, the second-largest volume this year following May (80,232 contracts).

Foreign investors also maintained a net selling position in 10-year treasury futures for four consecutive trading days from the 24th to the 29th, only shifting to a slight net buying position today.

Pushed by this foreign selling pressure, treasury bond yields broke out of their trading range for the first time in nearly three months.

The 3-year treasury bond yield was recorded at 2.58% per annum today, marking the fourth consecutive trading day since the 25th that it has exceeded the base interest rate (2.50% per annum).

Yields had been stuck in a tedious trading range, fluctuating between 2.4% and 2.5% from mid-June through the middle of this month. However, influenced by recent foreign selling pressure, they have broken through this range and climbed into the 2.5% range for the first time in about three months.

The 10-year yield also broke its annual high, reaching 2.951% today after hitting 2.943% on the 26th. The 30-year yield also set a new annual high of 2.841% today.

Bond market insiders attribute this primarily to the receding expectations for base rate cuts in both the US and South Korea.

For the US, "employment" is considered the key variable determining the pace of rate cuts. As opinions among Federal Reserve officials remain divided on the current state of the labor market, speculation has emerged that the pace of rate cuts may be slower than market expectations.

Lim Jae-kyun, a researcher at KB Securities, explained, "Hawkish Fed officials view the labor market as slowing but not significantly, while those advocating for aggressive rate cuts are calling for further reductions in response to future labor market cooling."

In Korea, base rate cuts are similarly hindered by the real estate market.

Although Bank of Korea (BOK) Governor Rhee Chang-yong and Monetary Policy Board member Hwang Kun-il have recently made consecutive remarks suggesting that stabilization of the real estate market is a prerequisite for a base rate cut, the current overheating of the housing market does not appear to be cooling easily, fueled by expectations of rising house prices.

Kim Ji-na of Eugene Investment & Securities [001200] predicted, "If instability is confirmed in indicators prioritized by the central bank, there is no reason to take on the risk of cutting rates quickly or significantly," adding that "the BOK's expected timing for a base rate cut within this year will likely be postponed from October to November."

With expectations for rate cuts weakening in both nations and the long Chuseok holiday approaching—during which the market will be closed, preventing any response—it appears foreign investors are continuing to adjust their positions through treasury futures sales. Even though treasury yields have risen significantly (leading to a decline in bond prices), inflows from domestic institutional buyers remain limited due to investment anxiety.

However, market participants are hopeful that if South Korea's inclusion in the World Government Bond Index (WGBI) is reaffirmed for April next year during the semi-annual review early next month, the resulting inflow of tracking funds could trigger a decline in yields. Yonhap News