The Bank of Korea's Monetary Policy Committee is expected to raise the base rate at its July regular meeting, but Samsung Securities researcher Kim Ji-man stated that the tightening itself may struggle to drive bond yield increases. Kim noted in a July meeting preview report that if the monetary policy statement and press conference prove less hawkish than market expectations, downward pressure on rates could dominate, given the sharp oil price decline and core inflation stability. The bond market has already substantially priced in the likelihood of this rate hike, with the 3-year government bond yield standing at 3.77% level, showing a spread of nearly 130bp over the base rate.
Bond Market Already Reflects Excessive Rate Hike Expectations
Kim Ji-man assessed that the bond market has already substantially priced in the possibility of this rate hike. The 3-year government bond yield stands at 3.77% level, showing a spread of nearly 130bp over the base rate. Forward rates reflect more than four rate hikes within one year. Given that Samsung Securities forecasts the final rate level at 3.50%, which is 100bp higher than current levels, the bond market is excessively reflecting base rate increases.
Inflation Assessment Depends on Central Bank's Core Price Evaluation
Kim pointed out that while consumer price index (CPI) may be passing its peak, the Bank of Korea's assessment of this trend remains crucial. He stated that considering oil prices fell from the $110 per barrel range to the low $70s following the US-Iran ceasefire agreement, headline inflation is highly likely past its peak. He emphasized that the key issue is the Bank of Korea's assessment of core inflation and demand pressure. Kim added that the intensity with which the monetary policy statement emphasizes demand-side pressure will determine concerns about consecutive rate hikes in August.
Ultra-Long Bond Weakness Continues Due to Insurance Company Positioning Changes
For ultra-long government bonds, relative weakness may continue regardless of the base rate decision. Kim explained that insurance companies' bond purchasing capacity has decreased, and the incentive for insurance companies to buy ultra-long bonds has lowered due to rising K-ICS (solvency ratio) ratios. He noted that how much further the ultra-long segment spread will expand depends on the Ministry of Economy and Finance's adjustment of ultra-long bond issuance volume.
FAQ
What did Samsung Securities researcher Kim Ji-man say about the Bank of Korea's July rate decision?
Kim Ji-man stated that the Bank of Korea's expected rate hike at the July meeting may not drive bond yield increases, noting that if the monetary policy statement and press conference prove less hawkish than market expectations, downward pressure on rates could dominate given sharp oil price declines and core inflation stability.
Why does the bond market already reflect excessive rate hike expectations?
The 3-year government bond yield stands at 3.77%, showing a spread of nearly 130bp over the base rate, and forward rates reflect more than four rate hikes within one year. Samsung Securities forecasts the final rate level at 3.50%, which is 100bp higher than current levels, indicating the market has already priced in significant tightening.
What factors are causing weakness in ultra-long government bonds?
Insurance companies' bond purchasing capacity has decreased, and rising K-ICS solvency ratios have lowered insurance companies' incentive to buy ultra-long bonds, creating structural weakness in this segment regardless of base rate decisions.
