Bank Bonds Surpass 5% After 12 Years... Mortgage Loans Approaching 8% Era

Over 33bp Surge in One Day... Highest Since 2010
Fixed-Rate Mortgage Loans at 5 Major Banks Reach 7%
Base Interest Rate Expected to Rise Sharply
Mortgage Loan 8% Era May Arrive Sooner

As the U.S. central bank, the Federal Reserve (Fed), hinted at additional interest rate hikes, attention is increasing on whether the Bank of Korea's Monetary Policy Committee will raise rates at its meeting scheduled for the 25th. The photo shows a loan counter at a commercial bank in downtown Seoul on the 19th. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Minwoo Lee] The 5-year financial bond (unsecured, AAA) yield, which serves as the benchmark for fixed-rate mortgage loan interest rates, has surpassed 5% for the first time in 12 years. This surge occurred in just one day amid growing recession concerns spreading through the asset market. With the base interest rate also expected to rise by nearly 1 percentage point within the year, there are forecasts that mortgage loan rates could increase more steeply than anticipated.

According to the Korea Financial Investment Association on the 27th, the 5-year financial bond (unsecured, AAA) yield recorded 5.129% the previous day. This is the highest level since March 2, 2010 (5.14%). It jumped 0.334 percentage points in one day, breaking the 5% mark for the first time in 12 years since August 9, 2010.

This is attributed to the reaffirmation of the U.S. Federal Reserve's (Fed) hawkish tightening stance, combined with negative European developments such as the UK government's tax cut announcement and the emergence of Italy's far-right government, which have increased domestic and international uncertainties and recession fears. As a result, not only the bond market but also the stock market was shaken. The KOSPI fell nearly 3% in one day, closing at 2220.94, its lowest level this year. The KOSDAQ also dropped more than 5% compared to the previous day, falling below the 700-point mark for the first time in 2 years and 3 months.

With the sharp rise in financial bond yields, there are expectations that mortgage loan interest rates could climb more steeply than anticipated. In fact, the upper limit of mortgage loan rates has already reached the 7% range. As of this date, the mixed-type (5-year fixed) mortgage loan interest rate range at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?is between 4.73% and 7.28%. Some banks have even seen the lower limit of rates exceed 6%. After reaching the 7% range in June, rates dropped to the 5% range earlier this month following regulatory pressure, but have now returned to previous levels in about three months.

As the Bank of Korea is expected to raise the base interest rate more steeply than anticipated, the possibility of mortgage loan rates entering the 8% range has increased further. To respond to the Fed's aggressive tightening policy, the Bank of Korea cannot avoid raising its base interest rate. The market expects the Bank of Korea to implement 'giant steps' (a 0.5 percentage point increase in the base rate at once) at both the upcoming Monetary Policy Committee meetings next month and in November, raising the base rate by 1 percentage point to 3.5%. Since the upper limit of mortgage loan rates has already exceeded 7%, it is expected to reach 8% comfortably.

Huh Jung-in, a researcher at Daol Investment & Securities, said, “If the interest rate differential between domestic and foreign rates widens excessively, foreign capital outflows could cause further market interest rate increases due to supply-demand imbalances in the bond market, as well as additional rises in the won-dollar exchange rate.” He added, “To reduce financial imbalances, the Bank of Korea will likely increase the tightening intensity more than expected.”