Daishin Securities "Bond Market Reflects Peak of Expected Inflation"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Daishin Securities analyzed on the 3rd that a change indicating that expected inflation in the bond market has peaked is being detected.

Gong Dong-rak, a researcher at Daishin Securities, stated, "Not only expected inflation in the bond market but also inflation expectations through surveys clearly confirm the peak." He also diagnosed that companies' willingness to raise prices is weakening.

Since the beginning of this year, the global bond market has been unable to escape a bearish trend due to continuous interest rate hikes. This is because central banks, including the Federal Reserve, are maintaining a tightening stance and expanding the scope of base rate increases. The background for the base rate hikes lies in the inflation situation, which has yet to stabilize.

Researcher Gong said, "When decomposing the recent rise in market interest rates into expected inflation (BEI) and real interest rate changes, expected inflation, which can be considered an inflation-related factor, appears to be very stable. Especially, the interest rate increases observed since the second half of the year are more influenced by real interest rates than by expected inflation."

Researcher Gong diagnosed, "Besides being a factor in market interest rate fluctuations, the BEI (Bond market Expected Inflation), which represents inflation expectations formed in the bond market, itself shows a clear stabilization trend since the second half of the year."

BEI, which reversed upward around the time of the COVID-19 outbreak, steadily rose last year, surpassing the Federal Reserve's inflation target of 2%, and in April this year, the 10-year BEI even broke above 3%. However, after confirming the peak, it showed a downward trend and significantly dropped to the low 2% range around the end of September.

This is evaluated not simply as a numerical decline. It is common for longer-maturity BEI to maintain a higher level compared to shorter-maturity BEI, as it considers potential future inflation changes as a form of uncertainty.

Researcher Gong explained, "The spread between the 10-year and 5-year BEI inverted to -65 basis points in March this year, reflecting concerns about rapid inflation increases. Recently, the negative spread has steadily narrowed, turning positive by the end of September."

Researcher Gong added, "We have previously stated that the overkill burden, which implies concerns that the economy may slow down due to accumulated base rate hikes, is appearing through the yield curve. The recent changes and stabilization in expected inflation indicators are also seen as one of the bond market's responses to overkill."