With the Constitutional Court’s decision to remove President Yoon Suk-yeol from office, the presidential election season has officially begun. In response, analysts in the securities industry predict that “supplementary budgets” and “fiscal policy” will become key topics in the bond market. The dollar-won exchange rate is expected to remain under upward pressure through the first half of the year, due to ongoing uncertainty stemming from U.S.-driven trade disputes.
On April 4, Kim Sungsoo, a researcher at Hanwha Investment & Securities, stated, “The impeachment ruling signals the start of the presidential election,” adding, “Assuming a change in administration, supplementary budgets and fiscal policy will be the main focus for the market.” Kim explained, “The current opposition party favors expansionary fiscal policy, so we expect large-scale supplementary budgets and government-led growth initiatives. While this could boost short-term growth, it may also heighten fiscal concerns, meaning both upward and downward pressures on interest rates will coexist.”
He predicted that the bond market would experience a box-range trend similar to the period following the 2017 impeachment. For the second quarter, he set the upper bounds of 3-year and 10-year Treasury bond yields at 2.65% and 2.85%, respectively. He also suggested that the yield curve could steepen, with long-term rates rising, and recommended “focusing on short-term bond purchases in the event of rate increases.”
Kim Byungyeon, a researcher at NH Investment & Securities, also commented, “The key point to watch going forward is the size of the supplementary budget. If the supplementary budget exceeds 20 trillion won, Korea’s economic stimulus momentum will increase, and in that case, long-term Korean interest rates will rise.”
Kim Sanghoon, a researcher at Hana Securities, predicted, “Ultimately, the direction of market interest rates will be determined by the Financial Monetary Committee’s decisions on the base rate in the second quarter (with two meetings scheduled in April and May), taking into account candidates’ campaign pledges, approval ratings, the high exchange rate, and financial stability during the election preparation process.” He added, “I place more weight on the potential for an upward revision of domestic inflation forecasts, due to supply-side pressures such as deficit-financed government bond issuance and rising food prices.” He recommended reducing exposure at 2.4% for 3-year Treasuries and 2.6% for 10-year Treasuries.
On the morning of April 4 in the Seoul bond market, the 3-year Treasury bond yield hovered around 2.474%, while the 10-year yield fell to around 2.716%.
Analysts also noted that the most significant impact of this impeachment ruling on the Korean financial market is the downward stabilization of Korea’s Credit Default Swap (CDS) premium. The CDS premium is an indicator of a country’s external creditworthiness. Recently, due to prolonged political uncertainty and the effects of U.S.-driven reciprocal tariffs, the premium had risen to levels seen during the 12·3 Emergency Martial Law incident. Kim Byungyeon projected, “With the resolution of Korea’s unique political uncertainty, the CDS premium will stabilize downward.”
In addition, despite the easing of domestic political uncertainty, the dollar-won exchange rate is expected to remain highly volatile due to concerns over U.S.-driven trade disputes. Lee Jaeman, a researcher at Hana Securities, said, “We believe upward pressure will dominate the dollar-won exchange rate through the second quarter,” forecasting fluctuations within a wide band of 1,430 to 1,480 won. He added, “Exchange rate stabilization is likely to occur in the second half of the year, as the U.S. dollar weakens in response to slowing U.S. employment and a potential rate cut at the June FOMC meeting, along with an increased likelihood of supplementary budget implementation in Korea.”
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
