Has the Interest Rate Peaked... Financial Bonds Reach 4.7% Level After Two Months

5-Year and 6-Month Terms Both Declining
COFIX Expected to Slow Amid Deposit Rate Competition Restraint
Mortgage Loan Rates Anticipated to Hold Steady for Now

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The financial bond yields, which serve as the benchmark for mortgage loan interest rates, have returned to the levels seen two months ago. This appears to be due to the market perception that the peak of domestic and international benchmark interest rate hikes has been reached. Consequently, mortgage loan interest rates have also shown a continuous downward trend. There is also a cooling atmosphere in deposit interest rate competition due to regulatory pressure.

According to the Korea Financial Investment Association on the 9th, the 5-year financial bond yield (AAA, unsecured), which is the reference rate for fixed-rate mortgage loans, has fallen to the 4.7% range since the beginning of this month. This is the first time in two months since October 4. On the 5th, it dropped to 4.703%, threatening the 4.7% level. The 6-month financial bond yield (AAA, unsecured), which serves as the benchmark for credit loans and some variable-rate mortgage loans, is also on a downward trend. As of the 7th, it stood at 4.511%, and on the 6th, it even fell to 4.499%. The 6-month financial bond yield showing the 4.4% range is the first since October 31 (4.489%).

This is interpreted as an effect of the Federal Reserve (Fed) and the Bank of Korea adjusting the pace of benchmark interest rate hikes. Fed Chair Jerome Powell officially announced a slowdown in the pace of rate hikes starting this month. Bank of Korea Governor Lee Chang-yong also hinted at the possibility of concluding rate hikes around 3.5% in a recent interview with foreign media, stating, "Although there is much uncertainty, if the situation proceeds as expected, rate hikes could end around 3.5%." This reflects market expectations that benchmark rates are nearing their peak.

Amid this atmosphere, mortgage loan interest rates at major commercial banks have also been falling one after another. As of the 8th, among the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?three banks’ upper limits for variable-rate mortgage loans have dropped to the mid-6% range, between 6.49% and 6.77%. KB Kookmin Bank (7.31%) and Woori Bank (7.36%) still showed rates in the 7.3% range. This contrasts with the upper limit reaching 7.8% on the 25th of last month.

With financial authorities ordering commercial banks to restrain interest rate competition, deposit interest rates have also stalled. According to the Korea Federation of Banks, many deposits offering 5% interest rates, which were common among commercial banks until mid-last month, have largely disappeared. Among the five major commercial banks, such products are almost nonexistent. Only a few banks, such as SC First Bank (up to 5.30%), BNK Busan Bank (5.40%), and Jeonbuk Bank (5.15%), offered products in the 5% range. Even savings banks have seen 6% deposit products vanish.

As deposit interest rate competition cools down, the likelihood of mortgage loan interest rates pausing for the time being has increased. Since deposit interest rates are reflected in the Cost of Funds Index (COFIX), which determines variable mortgage loan rates, a reduction in bank deposit rates is expected to narrow the month-on-month increase. The authorities’ intention to monitor loan rates more closely is also a factor suppressing rate hikes. A representative from a commercial bank said, "Since financial authorities have recently pressured not only deposit rates but also loan rates to decrease, the upward trend in loan rates is expected to subside for the time being."