Unlike the stock market, which has been in a "bull frenzy" day after day, the bond market is having a gloomy year-end. Expectations for a benchmark rate cut have shrunk, positive catalysts are missing, and the KOSPI's super-strong rally has weakened risk-off sentiment for safe assets.
According to the Korea Financial Investment Association on the 4th, as of the previous day the 10-year Treasury yield hit a record high for the year at 3.086% per annum, up 2.5 bp (1 bp = 0.01 percentage point) from the prior trading day. The 10-year yield has risen for five consecutive trading days since the 28th of last month, and after topping 3% for the first time on the 30th of last month, it has stayed above the 3% mark for three straight trading days.
In addition to the 10-year on the previous day, the 3-year (2.741% per annum), 5-year (2.883% per annum), 20-year (3.094% per annum), 30-year (3.009% per annum), and 50-year (2.837% per annum) all set record highs for the year. Bond prices and yields move in opposite directions, so a rise in yields means a fall in prices.
The recent rise in yields has occurred in a market lacking strong catalysts that could trigger a decline in rates, while expectations for a Bank of Korea (BOK) benchmark rate cut have been compressed to the limit.
Earlier, bond specialists stepped back after last month's meeting of the Monetary Policy Committee, pushing their expected timing for a rate cut from this month to the first half of next year. They judged that it will take time to verify the effects of the government's real estate policies, and that it is not a situation that warrants rushing a rate cut based on concerns about an economic slowdown.
But going further, there are even assessments that the Bank of Korea (BOK)'s rate-cut cycle has effectively ended. Kim Ji-man, a researcher at Samsung Securities, said, "At this year's last Monetary Policy Committee meeting on the 27th, the BOK's economic outlook will also be released, and with third-quarter gross domestic product (GDP) and the Korea-U.S. tariff negotiation agreement, there are expectations that growth forecasts for this year and next will be revised upward, raising caution."
He went on, "The factors released after the October Monetary Policy Committee meeting are reducing the need for rate cuts, and sufficient time will be needed to review financial stability conditions, making a benchmark rate cut effectively difficult," adding, "The base rate will be kept on hold at the current 2.5% through the end of next year."
While the probability of a December rate cut by the U.S. Federal Reserve (Fed) is considered quite high, it is being overshadowed by domestic conditions and is not being taken as a meaningful bullish catalyst. The exchange rate instability that the Bank of Korea (BOK) cited last month as one reason for holding rates steady is easing after the Korea-U.S. tariff negotiations, but it is not translating into expectations for a benchmark rate cut.