Amid fluctuations in exchange rates and the stock market due to the Dec. 3 martial law incident and subsequent impeachment situation, the government bonds market is showing a relatively stable trend. Compared to a month ago, more items saw a decrease in interest rates, and all interest rate levels were below the benchmark rate. Experts noted that market interest rates were more influenced by economic fundamentals rather than political issues, resulting in limited volatility.
◇ Government bond rates fall after martial law declaration… Foreigners continue net buying
According to the Korea Financial Investment Association on the 29th, despite the declaration of martial law by President Yoon Suk-yeol, government bond rates are maintaining a relatively stable trend. Comparing the final quotation yield on the 27th with that a month ago (Nov. 27), the interest rates for 1, 2, 3, 10, and 50-year bonds fell, while those for 5, 20, and 30-year bonds rose. Since bond interest rates move inversely with prices, this means that more government bonds experienced a price increase.
By maturity, the 1-year bond closed at 2.695% on the 27th, down 15.1 basis points (bp) from a month ago (2.846%). During the same period, the 2-year bond fell 2.4 bp (27th rate 2.776%), the 10-year bond fell 0.4 bp (2.876%), and the 50-year bond fell 1.2 bp (2.686%). On the other hand, the 5-year bond rose 0.1 bp (2.784%), the 20-year bond rose 4.6 bp (2.877%), and the 30-year bond rose 2.7 bp (2.805%).
The purchasing trend by foreigners and individuals is also stable. Foreigners had a net purchase of government bonds worth 1 trillion won in the over-the-counter market from the 27th of last month to the 27th of this month. During the same period, individuals had a net purchase of 484.8 billion won.
On the other hand, foreign exchange and stock market indicators are worsening. According to the Seoul Money Brokerage, the won-dollar exchange rate surged to 1,442 won during night trading on Dec. 3, the day martial law was declared, and exceeded 1,480 won as impeachment motions for President Yoon Suk-yeol and acting Prime Minister Han Duck-soo passed through the National Assembly. Based on the closing price for weekly trading at 3:30 p.m., it rose from 1,397 won on the 27th of last month to 1,467.5 won on the 27th of this month.
The stock market also experienced volatility as political uncertainty increased. The Korea Composite Stock Price Index (KOSPI), which closed at 2,500.10 on the afternoon of the 3rd, just before the martial law declaration, plummeted by 36.10 points (p) to close at 2,464 the following day. Although it rose after the passage of President Yoon's impeachment motion in the National Assembly, it fell to 2,388.33 during the day due to the approval of Acting Prime Minister Han's impeachment motion. The KOSPI closed at 2,404.77 on the 27th, a decrease of 98.29 points from the 27th of last month (2,503.06).
◇ Expectations for interest rate cuts and inclusion in WGBI… "Interest rates could rise with supplementary budgets"
There are various interpretations as to why the government bonds market is showing a stable appearance. Firstly, it is interpreted that market interest rates are more influenced by economic fundamentals, so the impact of political factors on the market is limited. Even during the nullification of the impeachment of former President Roh Moo-hyun in 2004 and the impeachment of President Park Geun-hye in 2016, government bond rates showed a downward trend.
Park Sang-hyun, a researcher at IM Securities, said, "Bonds reflect risks to the economy, and with prices falling sharply recently and the economy slowing down, expectations for additional interest rate cuts in January next year have increased," noting, "These expectations seem to have driven the decline in bond rates."
The government's market stabilization measures following the martial law declaration also had a positive impact. The Financial Services Commission has been operating a bond market stabilization fund worth 40 trillion won since the 4th to supply liquidity to the market. The Bank of Korea also plans to conduct irregular repurchase agreement (RP) buybacks until February next year and expand the scope of target securities and institutions.
Being included in advanced indices such as the World Government Bond Index (WGBI) is also a reason for uninterrupted investment funds. South Korea is included in the Bloomberg Barclays Global Comprehensive Index, one of the world's three major bond indices along with WGBI and the J.P. Morgan Emerging Market Bond Index, and will be included in WGBI from November next year. The government expects that with WGBI inclusion, around $56 billion (about 75 trillion won) of funds will flow into the government bonds market.
Cho Young-goo, a researcher at Shinyoung Securities, said, "Bonds are viewed as advanced assets among won-denominated assets, so foreigners have not withdrawn," adding, "Even if the selling trend appears, it was at a level of profit-taking following a rise in government bond prices." However, Cho noted, "There is room for interest rates to rise if a supplementary budget is issued," adding, "If the supplementary budget exceeds 10 trillion won, rates could increase by 7 to 10 basis points based on the 10-year bond."