In the domestic bond market, the average monthly yield spread between 10-year and 3-year Treasury bonds widened to 0.45 percentage point this month, according to data compiled on the 24th. As long-term yields rose, the long-short yield spread expanded to its widest in 4 years and 4 months since October 2021 (0.56 percentage point). Generally, a wider long-short yield spread is interpreted as the economy entering an expansion phase.
Expectations for an economic recovery are cited as the reason behind the recent widening of the long-short yield spread. Long-term yields reflect the outlook for economic growth and inflation. Analysts say that as growth forecasts have risen amid improving exports led by semiconductors, long-term yields have trended higher.
Rhee Chang-yong, governor of the Bank of Korea (BOK), said at a briefing to the National Assembly's Planning and Finance Committee on the 23rd that Korea's economic growth rate this year could exceed the BOK's previous forecast of 1.8%. As expectations for a recovery grew, the 10-year yield closed at 3.578%, up 3.8 bp from the previous day (1 bp = 0.01 percentage point).
President Lee Jae-myung's repeated remarks since early this year on the need to draw up an extra budget are also cited as a factor pushing up long-term yields. As the view spread that the government could maintain an expansionary fiscal stance, expectations for increased issuance of Government Bonds rose, lifting long-dated yields as well. If Government Bonds are issued additionally, Government Bond prices fall and Government Bond yields rise.
Ahn Jae-gyun, a research fellow at Shinhan Investment & Securities, said, "Typically, the 3-year is affected by the base rate, and the 5- to 10-year is affected by the issuance volume of Government Bonds," adding, "An extra budget can increase the supply of Government Bonds and will affect the rise in long-term yields." Baek Yoon-min, an analyst at Kyobo Securities, said, "Expectations that expansionary fiscal policy could be repeated will lead to higher long-term yields."
Short-term yields, by contrast, have been treading water as the base rate has been kept on hold for an extended period. The Bank of Korea held its base rate at an annual 2.5% for five consecutive meetings from July last year to January this year, after cutting the rate in February and May last year. Some in the market say the rate-cut cycle has effectively ended. Accordingly, the 3-year Government Bond yield has stayed around 3.15% from late January through the 23rd of this month.