SOUTH KOREA
- The BOK’s Governor Rhee has indicated publicly and to Parliament of his intent to reduce the Central Bank’s forecast for GDP Growth for 2024 and beyond.
- The BOK’s forecast for 2024 GDP of 2.4% has been put on notice to be revised down with Rhee speculating it could be either 2.2% or 2.3%.
- He also noted that 2025 is becoming more concerning given growing geopolitical risks and slowing exports for Korea.
- Looking back at recent history for rate cuts, it is not unusual for the KTB 2-year starting point to be inside that of base rates.
- During the rate cutting cycle of 2019, the starting point when rate cuts began for the 2-year KTB was c. 25bps lower than base rates (see figure 1) with yields moving lower as the rate cutting cycle began.
- Today, following the BOK’s cut last month and the recent period of higher US yields, the 2-year KTB yield is 35bps below base rates.
- In 2019 as rate cuts occurred, the 2-year traded down to 1.15%, to be 35 bps at the start of rate cuts, only to sell off and see yields in line with the base rate by the end of the year.
- Yield moves lately in Korea have highly correlated to the US so the question is what happens next?
- Using the MIPR function on BBG we observe that the Korean market currently has two rate cuts priced in before year end next year with multiple drivers challenging it.
- From global Central Banks cutting rates, to geopolitical turmoil and the push pull factor of the attempts to kick start the spluttering China economy.
- All of this is occurring as the BOK Governor is talking down domestic growth.
- Ultimately we see risks South Korean yields being more driven by domestic rather US factors. Additionally, the 2yr KTB yield didn't trough in 2020 until the BoK had finished easing.
Figure 1. South Korea 2yr Government Yield Versus The Policy Rate
- Source MNI - Market News / BBG.
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