The Vice President of the Bank of Korea's speech causes bond yields to soar, market anxiety intensifies

After Korea’s central bank (the Bank of Korea) Deputy Governor Liu Xiangdai publicly mentioned the possibility of raising the benchmark interest rate, on the 4th, government bond yields rose across the entire maturity range. Although yields initially fell in early trading as external uncertainty eased, market sentiment quickly reversed as signals emerged that the monetary policy stance might become more hawkish than expected.

That day, in Seoul’s bond market, the yield on 3-year government bonds rose by 2.0 basis points (1bp=0.01 percentage points) from the previous trading day, closing at an annual yield of 3.615%. The 2-year yield rose by 4.4 basis points to an annual yield of 3.519%, with the short-term maturities showing the most pronounced reaction. The 5-year yield increased by 1.7 basis points to an annual yield of 3.797%, and the 10-year yield rose by 0.9 basis points to an annual yield of 3.932%. Long-term maturities also climbed: the 20-year yield rose by 3.0 basis points to an annual yield of 3.906%, while the 30-year and 50-year yields increased by 2.5 basis points to annual yields of 3.815% and 3.674%, respectively. Rising bond yields mean falling bond prices, which has been interpreted as the market starting to price in a future benchmark interest rate level more aggressively.

The immediate catalyst for the shift in the interest-rate trajectory came from Deputy Governor Liu’s remarks. While visiting Samarkand, Uzbekistan, to attend the Asian Development Bank annual meeting and the meeting of the ASEAN+3 finance ministers and central bank governors, Deputy Governor Liu told reporters, “Now is the time to think about pausing rate cuts and instead considering rate hikes.” He is an ex officio member of the Bank of Korea’s Financial and Monetary Policy Committee. Recently, it has been rare for officials at committee level to directly mention the possibility of rate hikes in public statements. The market took this as a signal that the monetary authorities’ vigilance had increased significantly.

At the start of the session, the atmosphere was markedly different. As news emerged that international oil prices had fallen and that Iran had submitted a new negotiation proposal to the United States, the market formed expectations that external price pressures might ease. These kinds of factors are typically favorable for the bond market. However, once remarks from the Bank of Korea appeared during the trading session, attention shifted back to domestic price conditions and the outlook for the benchmark rate. In particular, ahead of the release of the consumer price index on May 6, following the Children’s Day holiday, analysts said that mentioning the possibility of rate hikes heightened concerns that inflation could come in higher than expected. The securities industry believed that, influenced by declining U.S. interest rates, domestic interest rates that opened lower ultimately saw short-term instruments lead the gains and close higher—precisely the result of the large impact of this policy signal.

On that day, foreign investors net bought 1,217 contracts of 3-year government bond futures and 6,396 contracts of 10-year government bond futures. This marked a return to net buying after 8 trading days since the 21st of last month. Market commentary suggests that this buy order, to some extent, capped the extent of the rise in yields. Overall, however, it was a day in which heightened caution driven by the Bank of Korea’s monetary policy direction and inflation indicators played an even stronger role. This trend is very likely to continue in the future, depending especially on inflation growth, exchange rates, international oil prices, and statements by relevant Bank of Korea officials, with short-term bond yields expected to be more sensitive to changes in the benchmark rate outlook.