Sovereign bonds take breather despite hawkish FOMC

South Korea’s state bonds took a breather Thursday despite a hawkish stance posed by the US Federal Open Market Committee during its decision to hold the key rate steady Wednesday.

On Thursday, the three-year state bond yield slid 2.5 basis point to 2.25 percent, while the five-year sovereign bond yield sank 3.2 basis points to 2.54 percent compared to the Wednesday session’s close, according to an estimate by the Korea Financial Investment Association. The 20-year bond yield dipped 2.7 basis point to 2.69 percent.

When bond prices increase, bond yields fall, and vice versa, meaning Thursday’s indices reflected a bullish trend in the market.

This marked a recess in the continuous bond yield uptrend in January. The 10-year treasury yield came to 2.78 percent Tuesday, the highest in three years. Also, throughout January, the 10-year treasury yield jumped 30 basis points. 

The US FOMC decided to keep its key rate unchanged at 1.25-1.5 percent Wednesday, months after a December hike by 0.25 percentage point, in the last meeting presided over by US Federal Reserve chair Janet Yellen.

But Yellen said in her speech that “inflation on a 12-month basis is expected to move up this year,” adding the Fed would be on course to “gradual adjustments” to implement three rate hikes this year, after the incoming chair Jerome Powell takes her place.

The remark gave Fed funds futures a 100 percent chance of a March rate hike, leading to the view by Helen Koo, a fixed income analyst at NH Investment & Securities, that fears of the looming US rate hike are already reflected on the already-low bond prices here.

“The tension surrounding monetary policy changes will be eased, so the upward pressure on bond yield will be limited.” Koo wrote in a note Thursday.

Another analyst Shin Eol, a fixed-income strategist at Shinhan Financial Investment, wrote in a Thursday report that the bond market in Korea had turned bearish, saying factors like weak inflation, growth in exports and unanimity in the FOMC decision are unlikely to reverse the bearish trend.

“The bond market in February will be more sensitive in factors that would trigger a rise in bond interest rates, while remaining inert in factors to calm down the rate increase,” wrote Shin.

“It is time for a conservative approach with cautious eyes on the market, because monetary policymakers are now rather goal-oriented (to carry out hikes).”

Also on Thursday, the local currency weakened against the greenback by 4 won from a day prior. The dollar was trading at 1,071.9 won at the session’s close. Stock markets were mixed, as the top-tier Kospi edged up 0.08 percent, while the second-tier Kosdaq sank 0.59 percent.

By Son Ji-hyoung 
(consnow@heraldcorp.com)