Government Bond Yields Rise on U.S. Rate Hike Concerns... Gains Narrow in Afternoon

Probability of September Fed Rate Hike Surges to Around 60%

Three-Year Yield Rises 5bp to 3.838%

Bank of Korea's Back-to-Back Hikes Already Priced In

Won-Dollar Rate Falls to 1,368.6; Long-Term Bonds Remain Steady

As the possibility of a U.S. benchmark interest rate hike came into focus, government bond yields in Korea rose across the board on August 31. However, as U.S. Treasury yields slowed in the afternoon and the won-dollar exchange rate fell, the scale of the rise narrowed somewhat.

Illustration of rising government bond yields.

On this day at the Seoul bond market, the yield on three-year government bonds closed at 3.838% per annum, up 5.0 basis points (1bp=0.01 percentage point) from the previous trading day.

The 10-year bond yield recorded 4.313% per annum, climbing by 2.9 basis points. The yields on the five-year and two-year government bonds also rose by 3.2 basis points and 2.6 basis points, ending at 4.053% per annum and 3.696% per annum, respectively. In contrast, the 20-year bond yield fell by 0.1 basis points to 4.490% per annum. The 30-year bond yield increased by 0.3 basis points to 4.527% per annum, while the 50-year bond yield dipped by 0.1 basis points to finish at 4.451% per annum.

Foreign investors were net sellers of 2,275 three-year government bond futures contracts on the day, but net buyers of 1,086 ten-year government bond futures. The upward movement in government bond yields was influenced by heightened concerns over additional benchmark rate hikes in the United States over the weekend.

Kevin Warsh, Chair of the U.S. Federal Reserve, stated during his keynote speech at the Jackson Hole Economic Policy Symposium on August 28 (local time) that the relevant indicators around price stability were in an "increasingly concerning situation."

He went on to add, "We need to be confident that underlying inflation is moving clearly and sufficiently toward our target. Otherwise, we have work to do," thus signaling a potential for further rate hikes. The market interpreted these comments as more hawkish than expected.

Yonggu Cho, a researcher at Shinyoung Securities, analyzed, "Chair Warsh's hawkish remarks were the primary reason for today's rise in government bond yields."

However, in the afternoon, the ascent in yields moderated and some long-term bond yields reversed to declines. Yeha Ahn, a researcher at Kiwoom Securities, explained, "U.S. Treasury yields slowed during trading hours in the Asian market, and sentiment that our yields have little room to rise further limited their increase. Additionally, the drop in the exchange rate also played a role."

The won-dollar exchange rate opened at 1,380.0 won, climbed up to 1,380.5 won in early trading, but then reversed its course. As of 3:30 p.m., the rate ended at 1,368.6 won, down 3.9 won from the previous trading day.

Despite Chair Warsh's hawkish remarks over the weekend, the influx of month-end dollar selling by exporting companies quickly alleviated the upward pressure on the exchange rate.

This content was produced with the assistance of AI translation services.