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SOUTH KOREA: Risks Of A Steeper Curve If Higher Issuance Meets Inflation Rebound

SOUTH KOREA
EM BulletBulletSouth KoreaAPACEmerging Market News
  • As the 10-year government bond in Korea hits yield levels not seen since late 2021, the question investors are asking is what are the catalysts for the next move in rates and what does that mean for the curve?
  • The KTB 2034 hit lows today of 2.88%, not seen since late 2021.
  • For the KTB 2027 at 2.76%, you must revisit early 2022 for similar levels.
  • The 3s10s curve, known for its flatness, has oscillated around in the +12-15bps for some time.
  • In July the South Korean government began the process for a KRW26 trillion aid package for 2025.
  • As it progresses through the various approval processes, there have been ongoing rumours it could be raised significantly.
  • Today an announcement was made by the Ministry of Finance that an additional KRW14 trillion will be made available to support domestic semi-conductor industries, and rumours are there could be further fiscal support to come on top of what is currently announced.
  • Using BBG’s functionality, analysis shows that 78bps of cuts are factored into market pricing over the next 12 months, consistent with the guidance coming from key BOK members.
  • If short end rates have fully factored in the expected rate cuts for next year, what could a steepening of the curve due to new government issuance look like?
  • The largest adjustment in the 10-year in Korea came as the COVID support excesses were unwound from markets with the 10-year in Korea moving higher in yield from 1.18% to 4.40%.
  • At today’s yield of 2.88%, a surge in government issuance could have limited technical support, pushing the 10-year back higher.
  • However, whilst issuance will have an impact on yields, the direction of the 10-year will continue to be correlated to the inflation backdrop and whether government policies can arrest the current decline.
  • With many market strategists suggesting that incoming US President Trump’s policies could be inflationary for the global economy, is it possible that for the first time in some time, there could be a meaningful steepening in the Korea curve as inflation returns at a time issuance is ramping up. 
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  • As the 10-year government bond in Korea hits yield levels not seen since late 2021, the question investors are asking is what are the catalysts for the next move in rates and what does that mean for the curve?
  • The KTB 2034 hit lows today of 2.88%, not seen since late 2021.
  • For the KTB 2027 at 2.76%, you must revisit early 2022 for similar levels.
  • The 3s10s curve, known for its flatness, has oscillated around in the +12-15bps for some time.
  • In July the South Korean government began the process for a KRW26 trillion aid package for 2025.
  • As it progresses through the various approval processes, there have been ongoing rumours it could be raised significantly.
  • Today an announcement was made by the Ministry of Finance that an additional KRW14 trillion will be made available to support domestic semi-conductor industries, and rumours are there could be further fiscal support to come on top of what is currently announced.
  • Using BBG’s functionality, analysis shows that 78bps of cuts are factored into market pricing over the next 12 months, consistent with the guidance coming from key BOK members.
  • If short end rates have fully factored in the expected rate cuts for next year, what could a steepening of the curve due to new government issuance look like?
  • The largest adjustment in the 10-year in Korea came as the COVID support excesses were unwound from markets with the 10-year in Korea moving higher in yield from 1.18% to 4.40%.
  • At today’s yield of 2.88%, a surge in government issuance could have limited technical support, pushing the 10-year back higher.
  • However, whilst issuance will have an impact on yields, the direction of the 10-year will continue to be correlated to the inflation backdrop and whether government policies can arrest the current decline.
  • With many market strategists suggesting that incoming US President Trump’s policies could be inflationary for the global economy, is it possible that for the first time in some time, there could be a meaningful steepening in the Korea curve as inflation returns at a time issuance is ramping up.