Post-Trump, interest rates and yields on bonds rise

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Post-Trump, interest rates and yields on bonds rise

Published: 15 Nov. 2016, 20:46

The election victory of Donald Trump has impacted Korea’s bond market and interest rates charged by the country’s major banks, as anticipation rises of rate hikes by the Federal Reserve.

Ever since the Republican’s victory, the yield on 10-year Korean government bonds has surpassed the psychologically significant 2 percent level to reach 2.04 on Tuesday.

At the end of October, the rate stood at 1.69 percent, according to data provided by Korea Financial Investment Association.

That trend follows a global bond rout as investors dumped $1.2 trillion worth of bonds on expectations that Trump’s proposed infrastructure spending and tax cuts will result in higher inflation and higher amounts of U.S. government debt.

The yield on the benchmark U.S. Treasury 10-year note climbed to 2.26 percent on Monday, the highest closing level since Jan. 1.

“After the U.S. election result came out, the local bond market experienced fluctuation in the rise of yield rate,” said Park Jong-yeon, a researcher at NH Research Center.

“At the beginning, the yield rate went down on uncertainties, but later it turned upward over investors’ concerns about inflation and the U.S. government issuing large-scale government bonds for infrastructure spending.”

Trump’s economic policy would mark a reverse from recent market trends in which the absence of inflation allowed for a rally in bond markets.

The possibility of the U.S. Fed raising its key interest rate in December bolstered the view that the era of low interest rates has come to an end.

While higher rates could help banks’ profits, it negatively effects households and companies with debt.

Lee Ju-yeol, governor of the Bank of Korea, acknowledged last Friday that “a higher rate can place a burden on marginalized groups with low income levels.”

The governor hinted that the central bank would take various measures if market volatility widens. Interest rates on mortgages have already risen.

The fixed rate on mortgages at KB Kookmin ranged from 2.57 percent to 3.88 percent depending on a borrower’s credit rating as of the end of October. Now the range is 3.18 percent through 4.48 percent.

“The rate is affected by various factors,” a source at KB Kookmin Bank said, “The higher yield rate of U.S. Treasury bonds and higher expectations for inflation led to higher lending rates.”

At Woori Bank, a fixed rate mortgage was available with 2.94- 4.24 rates in October. The range rose to 3.03-4.33 percent as of Nov. 14, according to industry estimates.

With the surging yield rates, market analysts expect companies to hold back on plans to issue corporate bonds.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]