Treasuries take a beating after BOK announcement

A day after the central bank unexpectedly froze the country’s benchmark rate, the yield on government bonds tumbled yesterday with mainly foreign investors selling their holdings.

According to the Korea Financial Investment Association, the yield on three-year government bonds was 2.67 percent yesterday, up 0.04 percentage point from Thursday. The yield on five-year bonds rose 0.04 percentage point to 2.76 yesterday compared to 2.72 percent on Thursday. Yesterday was the second consecutive day that yields for government bonds jumped, signaling weaker prices.

The sharp increase in yields for government bonds comes as the monetary policy committee of the Bank of Korea (BOK) decided to leave the key interest rate unchanged at 2.75 percent for the sixth consecutive month.

The market had been expecting a 0.25 point rate cut after the government recently cut this year’s growth outlook from 3 percent to 2.3 percent.

The BOK had been pressured by the government and political circles to lower the rate to help stimulate the economy in line with the government stimulus policy that includes a proposed supplementary budget.

“The market has received the monetary policy committee’s decision to leave the benchmark interest as a big shock,” said Shin Eol, a researcher at Hyundai Securities. “Investors that had waited for the central bank to lower the rate have shown a great amount of [bond] trading.”

On Wednesday, a day before the BOK’s announcement, yield for three-year treasury bonds was 2.48 percent and 2.58 percent for five-year treasuries.

Fluctuations on government bond yields were greatest last July, when the central bank decided to lower the benchmark rate. Analysts predict it will take some time for the bond market to stabilize after the central bank hinted that it may leave the rate unchanged for the rest of the year.

BOK Governor Kim Choong-soo told reporters the bank “was confident that the economy was improving at a pace that was expected.”

In the meantime, unlike the treasury bond market, the banking sector is welcoming the BOK’s decision. If the central bank had lowered the benchmark rate, banks would have had to follow suit and that would eventually reduce revenue from interest on loans.

By Lee Eun-joo [angie@joongang.co.kr]