A rally in South Korean bonds may prove fleeting as the effect of government-led measures to quell volatility fades and expectations of further monetary policy tightening build, according to strategists. With global bond yields hovering around multi-decade highs, strategists at Gama Asset Management SA and Hana Securities Co. are among those expecting Korean three- and 10-year yields to resume their climb and retest the four-year highs reached last month. Adding to the bearish outlook, won swaps are pricing in about a 70% chance that the Bank of Korea will raise interest rates by a cumulative 50 basis points over the next six months. South Korean bonds have stayed under pressure this year as the Middle East war fueled inflation concerns through higher oil prices, while surging Treasury yields added to the strain as traders bet on further Federal Reserve rate hikes. Seoul has vowed measures to curb rising yields even as inflation remains above target and the booming semiconductor and memory-chip industries drive stronger-than-expected economic growth.
"I am becoming more cautious on Korean bonds," said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. "Inflation remains above the Bank of Korea’s target, and further policy tightening is likely. If the global bond selloff continues, it will become increasingly difficult for Korean yields to resist the upward pressure." De Mello expects Korean 10-year yields to return to around 4.6%, a level last seen in September and the highest since 2022, while the three-year yield may climb to 4.1% from 3.98% on Thursday. Korean bonds rebounded across the curve after authorities warned of intervention last month and cut planned notes sales for this month by 5 trillion won ($3.74 billion). Now traders see the BOK rate decision later this month as the next probable trigger for the market. The central bank has raised borrowing costs at back-to-back meetings to 3% to curb inflation as growth accelerates. A six-month dot plot released by the BOK in August showed 10 of 21 dots clustered at 3.25%.
Park Junwoo, a fixed-income strategist at Hana Securities, said it was premature to interpret falling yields amid heightened volatility as a trend. He expects yields to peak around the central bank’s November policy meeting when he sees a hike after a hold on Oct. 22. "I don’t think now is the time to buy, but it would be worth buying again if it goes back above 4%," Park said, referring to the three-year yield. The firm is underweight on both Korean and US bonds. But any surge in yields is likely to invite more government intervention. Buoyed by a tax windfall from the semiconductor industry, Finance Minister Lee Hyoung Il has said the government may further cut back planned debt sales to contain excessive moves in yields, and conduct emergency buybacks. "It won’t be too late to wait for the BOK’s dot plot in November" to buy Korean bonds, said Woo Hye-young, a fixed-income analyst at LS Securities Co., who expects yields to ultimately ease into the year-end. "If the November dot plot shows something higher, I’d be more cautious."
Source: Bloomberg Markets · Summarized by HeadlinesBriefing