Korean treasury yields climb on heavier issuance outlook

(News1)

South Korean treasury yields have been on a steady upward trend since mid-September as expectations for a base rate cut fade and bond issuance is expected to rise sharply due to next year’s massive 728 trillion won ($499 billion) budget.

According to data from the Korea Financial Investment Association on Sunday, the 3-year treasury yield closed at 2.894 percent on Friday, up 6 basis points from the prior session.

The 5-year and 2-year yields rose 5 basis points and 5.1 basis points, respectively, to finish at 3.043 percent and 2.752 percent.

The 10-year and 20-year yields each gained 2.3 basis points to end at 3.226 percent and 3.213 percent. All maturities except the 1-year reached their highest levels of the year.

The 3-year yield is now at its highest since November last year and the 10-year at its highest since July last year. A modest reduction in short term issuance this month helped limit the move in the 3-year relative to longer tenors.

The jump in yields reflects expectations that the Bank of Korea will hold rates steady for longer as property markets stay overheated and economic data remains firm.

“Yields have been climbing since mid-September on faster property price gains and more hawkish signals from policymakers,” said Choi Ji-uk, an analyst from Korea Investment and Securities.

The Lee Jae-myung administration’s plan to lift next year’s budget by 8.1 percent from this year has reinforced expectations for heavier bond supply. Larger issuance typically pushes prices lower and yields higher.

Kim Chan-hee at Shinhan Securities said in a report last week that competitive bidding for treasuries reached 15 trillion won in November following the second supplementary budget, more than double the 6.1 trillion won recorded a year earlier. He said demand has weakened as foreign investors and banks, previously the main buyers in the 2.8 to 3 percent range, stepped back, leaving the market struggling to absorb increased supply. Higher treasury yields lift the benchmark for broader market rates.

As of Friday, mortgage rates at KB Kookmin, Shinhan, Hana and Woori for hybrid mortgages linked to 5-year bank bonds ranged from 3.82 to 5.28 percent. The lower bound rose about 0.13 percentage point from October 31 and about 0.36 percentage point from late August as banks’ funding costs increased alongside treasury yields.

Some analysts expect yields to ease beginning in April when 60 to 80 trillion won of passive inflows tied to the World Government Bond Index start to enter the market.

“Yields around 3.80 percent for the 3-year and 3.2 percent for the 10-year remain attractive even with short term upside risks and recommended using current levels as a buying opportunity,” said Kim.