South Korea’s property curbs are set to drive up shorter bonds

[SEOUL] South Korea’s shorter-maturity government bonds are expected to get a boost as the latest round of measures from local authorities to cool the housing market spur expectations for an interest-rate cut next month.

Yields on the nation’s policy-sensitive three-year bonds came off their highest level since March after the government rolled out measures to cool the red-hot housing market. That’s because any drop in real estate prices would make room for the Bank of Korea (BOK) to cut borrowing costs without the risk of creating a property bubble.

“If the government’s housing policy slows transactions, lending and price expectations, it could revive expectations for a rate cut in November, bringing the three-year yield down to around 2.45 per cent,” said Bumki Son, an economist at Barclays.

This renewed optimism for policy easing comes after high property prices had delayed rate cuts in South Korea, keeping bond yields elevated. BOK kept its policy unchanged in the last two meetings and is expected to do the same on Thursday (Oct 23) as it waits to assess the impact of the latest measures.

Looking past Thursday’s pause, Kang Seungwon, a bond analyst at NH Investment & Securities, sees a higher chance of a November BOK rate cut and a drop in three-year yields to 2.4 per cent in the short term.

“With the government’s new housing package and the Fed signalling rate cuts and the end of quantitative tightening, a November rate-cut consensus is forming again,” he said. “But for a November cut to happen, the current housing measures must prove effective.” BLOOMBERG