Long-term Bond Yields Plunge on Expectations of US Rate Cut
"Fixed Rates Advantageous as Market Rate Reflection Takes Time"
The phenomenon of fixed interest rates on housing-related loans at commercial banks being lower than variable rates, known as the ‘inversion phenomenon,’ is causing borrowers to deeply consider switching from fixed (or mixed) rate products. This trend is expected to continue for the time being as long-term bond yields, which serve as the benchmark for fixed rates, have plummeted amid expectations of a U.S. interest rate cut.
According to the financial sector on the 19th, the 2-year fixed interest rate for Shinhan Bank’s ‘Solpyeonhan Jeonse Loan,’ guaranteed by the Korea Housing Finance Corporation, was 3.72?5.23% as of the previous day, which is 0.44 percentage points lower at the lower end than the variable rate (4.16?5.57%). Woori Bank’s ‘Woori WON Jeonse Loan,’ also guaranteed by the Korea Housing Finance Corporation, has a 2-year fixed rate of 4.22% (lowest rate), which is 0.86 percentage points lower than the 6-month variable rate of 5.08%. Similarly, Hana Bank’s Jeonse loan fixed rate (4.2%) is about 0.8 percentage points lower than its variable rate (5.0%).
Generally, fixed rates are set higher than variable rates, which change every six months, because they allow for more stable loan management. However, the opposite phenomenon is currently occurring.
This is due to the sharp drop in long-term bond yields amid growing expectations of a U.S. interest rate cut next year. Fixed rates on Jeonse loans at commercial banks follow the 2-year financial bond yield, a long-term bond, while variable rates follow the 6-month financial bond yield. The 2-year financial bond yield, which rose to 4.45% on the 1st of last month, fell to 3.75% as of the previous day, dropping 0.7 percentage points in less than two months. As the 2-year yield plunged, an inversion with short-term yields also occurred. Until early November, the 6-month yield was about 0.4 percentage points lower than the 2-year yield, but as of the previous day, the 6-month yield (3.88%) was higher than the 2-year yield (3.75%).
Housing mortgage loans showed a similar trend. As of the previous day, the fixed rates for mortgage loans at the five major commercial banks ranged from 3.39% to 5.52%, lower than the variable rates of 4.55% to 6.26%. The 5-year bank bond yield, which serves as the benchmark for fixed mortgage loan rates, was 3.64% as of the 15th, down 0.87 percentage points from 4.51% in early last month.
A financial sector official explained, “Bond yields tend to reflect future market conditions in advance, so the preference for short-term bonds is pushing interest rates up.”
Borrowers using housing-related loans are also deeply concerned about choosing between fixed and variable rates. Given the current outlook that the pace of U.S. interest rate cuts will be gradual and that it will take time for this to be reflected in domestic market rates, many believe that the currently lower fixed rates are advantageous. A representative from a commercial bank said, “It is difficult to predict the extent of rate cuts, so if uncertainty is high, it is better to choose the fixed rate, which is currently lower.” Another industry insider added, “When the interest rate gap is as large as 0.4 percentage points, as it is now, the likelihood of a sharp short-term drop in variable rates is low, so many borrowers choose fixed rates.”
On the 23rd, as domestic market interest rates and bank loan interest rates rapidly rise, a banner displaying loan interest rates is hung on the exterior wall of a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@
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