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SOUTH KOREA: BOK’s Pledge Appears to be Working.

SOUTH KOREA
EM BulletBulletSouth KoreaAPACEmerging Market News
  • Yesterday the BOK pledged to use a variety of measures to keep financial markets stable.
  • The BOK undertook to increase short term liquidity and take ‘active’ steps in currency markets as needed to ensure stability (as per press statement post emergency BOK board meeting).
  • Bond futures have opened strongly again today with Korea’s 10YR Future +0.25 at the open and the 3YR Future +0.05.
  • Bond yields are lower across the curve.  2YR 2.770% (-0.5bp); 5YR 2.627% (-0.2bp); 10YR 2.761% (-0.9b)
  • Looking at 1-year lows in yield, the front end is approximately 3-5bps above the 1-year lows and the 10 year has been bouncing off the 1 year low.
  • Over the course of the next 12 months, the Korean bond market has already priced in -83bps of cuts.
  • Looking at the period post GFC 2009 to pre-COVID 2020 as a normalized period for Korean monetary policy sees an average of 2.13%, roughly like what is priced in at present.
  • So, what could alter the course for rates?
  • For now, the BOK Governor has said that it is unlikely they will cut interest rates in an out of cycle meeting, playing down the impact on the broader economy.
  • However, the start of this current BOK easing cycle came due to (among other things) concerns for a slowing consumer and this latest political development is likely exacerbate that trend.
  • What is not priced in and poses a potential risk for bond investors is a more aggressive BOK when next they meet on January 16, 2025. 
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  • Yesterday the BOK pledged to use a variety of measures to keep financial markets stable.
  • The BOK undertook to increase short term liquidity and take ‘active’ steps in currency markets as needed to ensure stability (as per press statement post emergency BOK board meeting).
  • Bond futures have opened strongly again today with Korea’s 10YR Future +0.25 at the open and the 3YR Future +0.05.
  • Bond yields are lower across the curve.  2YR 2.770% (-0.5bp); 5YR 2.627% (-0.2bp); 10YR 2.761% (-0.9b)
  • Looking at 1-year lows in yield, the front end is approximately 3-5bps above the 1-year lows and the 10 year has been bouncing off the 1 year low.
  • Over the course of the next 12 months, the Korean bond market has already priced in -83bps of cuts.
  • Looking at the period post GFC 2009 to pre-COVID 2020 as a normalized period for Korean monetary policy sees an average of 2.13%, roughly like what is priced in at present.
  • So, what could alter the course for rates?
  • For now, the BOK Governor has said that it is unlikely they will cut interest rates in an out of cycle meeting, playing down the impact on the broader economy.
  • However, the start of this current BOK easing cycle came due to (among other things) concerns for a slowing consumer and this latest political development is likely exacerbate that trend.
  • What is not priced in and poses a potential risk for bond investors is a more aggressive BOK when next they meet on January 16, 2025.