The recent recovery in South Korea's bond market is coming under mounting pressure.
The effect of government-led intervention measures is fading, while expectations for further monetary tightening by the Bank of Korea (BOK) continue to build. On October 12, according to Bloomberg, pricing in the Korean won swap market currently indicates roughly a 70% probability that the BOK will raise rates by a cumulative 50 basis points over the next six months.
Strategists at institutions including Gama Asset Management and Hana Securities expect South Korea's 3-year and 10-year government bond yields to resume their upward climb and retest the four-year highs touched last month.
Rebound Lacks Staying Power
The earlier rebound in Korean bonds was mainly driven by government intervention signals. Authorities warned last month that they would take intervention measures and cut October bond issuance by 5 trillion won (about $3.74 billion), sending yields lower across the entire curve.
But strategists broadly agree that this rebound lacks a sustainable foundation.
Rajeev De Mello, global macro portfolio manager at Gama Asset Management, said: "I am becoming increasingly cautious on Korean bonds. Inflation remains above the Bank of Korea's target, and further tightening is quite likely. If the global bond selloff continues, Korean yields will find it increasingly difficult to resist upward pressure."
De Mello expects South Korea's 10-year government bond yield to climb back to around 4.6% — a level seen last month and the highest since 2022. The 3-year yield could rise from Thursday's 3.98% to 4.1%.
Rate Hike Expectations Dominate the Market
The Bank of Korea has raised rates at two consecutive meetings, lifting the benchmark rate to 3%, in response to inflationary pressure and accelerating economic growth. In August, the BOK's six-month dot plot showed that 10 of 21 dots were clustered at 3.25%.
The market is now focused on the October 22 rate-setting meeting and the subsequent November meeting.
Park Junwoo, fixed-income strategist at Hana Securities, said that amid elevated volatility, interpreting falling yields as a trend change is "premature." He expects yields to peak around the November rate-setting meeting — when he judges the central bank will raise rates in November after holding steady in October.
"I don't think now is the time to buy, but if the 3-year yield returns above 4%, it would be worth buying again," Park Junwoo said. Hana Securities currently holds an underweight position on both Korean and U.S. bonds.
Can Government Intervention Provide Support?
Although upward pressure on yields persists, the government's willingness to intervene remains a buffer for the market.
Buoyed by tax benefits from the semiconductor industry, South Korean Finance Minister Lee Hyoung Il said the government may further reduce planned bond issuance to curb excessive yield volatility and could launch emergency repurchase operations.
However, Woo Hye-young, fixed-income analyst at LS Securities, believes investors need not rush to act. "Waiting until the central bank's November dot plot is released before buying Korean bonds won't be too late," she said. "If the November dot plot shows higher rate expectations, I would become more cautious." Woo Hye-young expects yields to ultimately decline before the end of the year.
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