As expectations that Korea and the United States will cut their benchmark interest rates further within the year have weakened, bank lending and deposits rates are rising. That is because the outlook for a rate hold has been priced into the market, pushing up bank bond yields. Experts said the upward trend in bank lending and deposits rates is likely to continue for a while.
According to the Korea Financial Investment Association on the 17th, the yield on five-year AAA bank bonds, which serves as the benchmark for fixed-rate mortgage loan rates, stood at 3.345% on the 13th. That is up 0.43 percentage point from 2.915% on Aug. 14. It is the first time in 13 months since Oct. last year that bank bond yields have exceeded 3.3%.
Market rates are rising because the U.S. Federal Reserve and the Bank of Korea are increasingly likely to hold their benchmark rates for the time being. Loretta Mester, president of the Cleveland Federal Reserve Bank, said on the 13th (local time), "I think it is necessary to keep the policy rate near its current level and maintain monetary policy at a restrictive stance."
Rhee Chang-yong, the Bank of Korea (BOK) governor, also said in an interview with Bloomberg TV released on the 12th, "The extent or timing of a rate cut, or a change in direction, could vary depending on new data."
Joo Won, head of research at Hyundai Research Institute, said, "Right now both the Fed and the Bank of Korea (BOK) are placing greater weight on holding rates," adding, "As this sentiment is reflected in market rates, an "overshooting (a temporary surge)" has occurred."
Rising bank bond yields are leading to higher lending and deposits rates. This month, the average mixed-rate mortgage loan rates were 4.02%–5.42% at KB Kookmin Bank, 3.91%–5.32% at Shinhan Bank, 3.94%–5.14% at Woori Bank, and 3.975%–5.175% at Hana Bank. Compared with early September, they rose by 0.3–0.5 percentage point (P). Over the same period, deposits rates at the four major banks also rose by 0.05–0.15 percentage point to an average in the 2.7% range.
Experts expect the rise in market rates to continue through the end of the year. In addition to the outlook for a rate hold, there are factors pushing rates higher. The government must invest $20 billion (about 29.11 trillion won) in the United States every year, and it plans to cover any shortfall by issuing Government Bonds. Banks also need to increase bond issuance to raise funds for the National Growth Fund, which has been expanded to 150 trillion won. Typically, when bond issuance increases, bond prices fall and yields rise.
Yoon Yeo-sam, an analyst at Meritz Securities, said, "The net increase in Treasury issuance is likely to be maintained for the time being," adding, "It is inevitably a situation where the burden of bond supply will grow."
Joo, the head of research, said, "Because the (rate-hold sentiment) has already been priced in, the increase will not be as large as in the past few weeks, but the upward trend is expected to continue."