South Korea’s stimulus plan likely to drive up bond yields
SOUTH Korea’s bid to tackle a slowing economy via fiscal stimulus will pressure the won and may steepen the yield curve at a time when the bond market is already absorbing a record amount of issuance.
Faced with potential US tariffs and fallout from its brush with martial law, the country is looking at stimulus to help the economy. The opposition party, which holds a majority of seats in parliament, recently proposed an outlay of 35 trillion won (S$32.7 billion) – and there have been suggestions to sell more debt to help fund the expenditure.
Any additional supply stands to drive up bond yields and steepen the curve, according to analysts. The actual amount is likely to be determined in the coming weeks.
“While the Korean treasury bonds may experience bouts of upward pressure on yields, we see them as trading opportunities,” said William Xin, a fixed-income portfolio manager at M&G Investments.
“The combination of currently soft macroeconomic fundamentals and expectation of lower policy rate in 2025 should provide some support to the market,” with the 10-year and 30-year notes currently most attractive on a risk-return basis, he said.
Now-impeached President Yoon Suk-yeol triggered the worst political crisis in decades by briefly imposing martial law on Dec 3. The resulting chaos battered consumer confidence, adding to currency headwinds – Korea’s won has been the worst-performing currency in Asia over the past six months, losing 7 per cent versus the greenback.
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The country has one of the largest trade surpluses against the US, making it particularly vulnerable to American trade policy changes. Bank of Korea (BOK) last month cut its forecast for gross domestic product growth. All that has brought the discussion of fiscal stimulus to the fore.
BOK governor Rhee Chang-yong has suggested a supplementary budget of between 15 trillion won and 20 trillion. The 35 trillion won figure, proposed by the opposition Democratic Party, is likely too contentious, according to Kim Myoung-sil, an analyst at iM Securities.
But if the fiscal outlay really does prove that large, “the market will be shocked and the yield on government bonds will spike”, she said.
Both the scale and timing of any infusion to boost the economy would be key for market reaction, according to Daishin Securities.
“With an extra budget, curve steepening is natural for long-term supply” said Kong Dongrak, an analyst at Daishin. “A 25 trillion won extra budget would not be as sensitive, but a 30 trillion won budget would weigh on the bond market.” BLOOMBERG
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