3-Year Government Bond Yield Surpasses 2% for First Time in 3 Years... Reflecting Expectations of Base Rate Hike

[Asia Economy Reporter Kim Daehyun] Amid strong inflation and signs of tightening, the market benchmark interest rate for the 3-year government bond has surpassed 2% annually for the first time in three years.

On the 27th in the Seoul bond market, the 3-year government bond yield closed at 2.044% annually, up 9.7 basis points (1bp = 0.01 percentage points) from the previous trading day. This is the highest level in over three years since October 16, 2018 (2.048% annually). It is also the first time since October 24 of that year (2.007% annually) that the yield closed above 2% annually.

Except for the 20-year bond which closed lower, yields across all maturities hit new annual highs. The 10-year bond yield rose 3.0bp to 2.487% annually, the highest in about 3 years and 2 months since August 14, 2018 (2.503% annually). The 5-year and 2-year bonds increased by 8.2bp and 9.9bp respectively, closing at 2.338% and 1.764% annually. The 30-year and 50-year bonds each rose by 0.5bp, recording 2.443% annually. Only the 20-year bond decreased by 0.5bp to 2.487% annually.

With inflation pressures rising worldwide and concerns about tightening spreading, interest rates continue their upward trend. On the 21st, the US 10-year Treasury yield surged to the 1.7% range intraday amid talks of the Federal Reserve’s (Fed) imminent tapering (reduction of asset purchases) and the possibility of an early rate hike.

South Korea’s government bond yields have also been on a steady rise since early this month. After a decline mainly in short-term bonds last week entering a correction phase, yields have been climbing again since the 22nd.

When Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki mentioned the possibility of adjusting this year’s government bond issuance volume and implementing an emergency buyback (early redemption) the day before, the rise in yields somewhat slowed. However, stronger-than-expected inflation in Australia led to a simultaneous increase in global interest rates including Australia’s during the Asian session, putting renewed downward pressure on the domestic bond market. Analysts also suggest that the global rate hike environment is reinforcing expectations for a Bank of Korea base rate increase, pushing yields higher.