Currently high buying appeal but limited expansion
Low possibility of additional rate hikes by the Bank of Korea
Hawkish outlook for October Monetary Policy Committee and November FOMC
In October, the bond market is expected to continue a bearish trend due to ongoing uncertainties in monetary policy.
Ahn Yeha, a researcher at Kiwoom Securities, stated in a report titled "Reasons for the Narrowing of the Long-Short Term Interest Rate Inversion" on the 27th that "volatility in government bond yields is also inevitable."
Ahn explained, "The possibility of additional rate hikes by the Bank of Korea is low, making buying at the current level attractive," but added, "Since the October Monetary Policy Committee and the November Federal Open Market Committee (FOMC) are expected to maintain a hawkish stance, the expansion of buying pressure is likely to be limited."
Ahn also analyzed that the Federal Reserve's (Fed) decision to keep the possibility of additional hikes open at the September FOMC and the Fed's soft landing outlook, along with changes in economic assessments, are bearish factors.
Recently, rising international oil prices have also contributed to increased volatility. If concerns about prolonged high interest rates materialize, there is a possibility of additional upward pressure on rates.
In particular, volatility may increase ahead of the November FOMC depending on economic indicators such as employment and inflation. Ahn predicted, "If the Fed continues to view the economy positively and indicators exceed expectations, resulting in a stronger-than-expected trend, it will act as a factor driving market interest rates higher."
Kiwoom Securities judged that the likelihood of the Fed implementing additional hikes at the November and December FOMCs is low. Ahn stated, "The Fed's upward revision of economic growth is due to better-than-expected growth in the second and third quarters," adding, "However, a slowdown centered on household consumption is likely in the fourth quarter."
Even if the possibility of policy rate hikes is low, it is expected to take some time for bond buying sentiment to recover due to policy uncertainty. This is because if concerns about a U.S. government shutdown are temporarily resolved, the expansion of U.S. Treasury issuance could continue in line with fiscal expansion policies.
The November FOMC will be held from October 31 to November 1. The U.S. Treasury Department is scheduled to announce its quarterly funding plan on October 30 and November 1. If the funding scale is announced to be larger, supply-demand risks will be highlighted, potentially driving interest rates higher. Ahn pointed out, "Even if it does not lead to an actual hike, bond buying sentiment is unlikely to recover until there is a confirmed rebound in the unemployment rate and further declines in inflation."
He added, "We expect the interest rate band to rise on both the upper and lower ends through mid-fourth quarter, maintaining an upward trend," and analyzed, "Volatility will continue as the 10-year U.S. Treasury yield, which we consider the upper limit, frequently records levels above 4.5%." This explains why volatility in government bond yields is also inevitable.
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