BOK buys 1.5 trillion won in bonds to stabilize market

With the financial market jittery since U.S. Federal Reserve Chairwoman Janet Yellen’s hinted at raising U.S. interest rates, Korea’s central bank announced it intends to intervene in the local market with the hopes of stabilizing it for the first time in eight years.

The Korean central bank said it will buy six government bonds worth 1.5 trillion won ($1.27 billion) at 2 p.m. today ranging from those with maturities of three years to those that mature in 20 years.

This is not the first time that the Bank of Korea has purchased Korean bonds; it purchased them three times last year alone. The last time was in October 2015, when the BOK bought 700 billion won in bonds. However, this is the first time since the 2008 global crisis that the Korean central bank is purchasing such a massive amount of government bonds. That year, the bank bought 1 trillion in treasuries on Nov. 19.

Market instabilities have risen since Donald J. Trump’s upset victory in the U.S. presidential election on Nov. 8. After the real estate mogul won the election, Korean bond interest has been rising rapidly, breaking this year’s all-time high.

The interest rates have been rising because the market expects massive spending by the U.S. government to bolster the U.S. economy once Trump takes office, leading to inflation.

Such concern has been further fueled by the imminent U.S. interest hike next month.

“The Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objective,” U.S. Fed. Chairwoman Yellen told a U.S. congressional committee on Thursday.

“This judgment recognized that progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year,” Yellen said. “And inflation, while still below the Committee’s 2 percent objective, has increased somewhat since earlier this year. Furthermore, the Committee judged that near-term risks to the outlook were roughly balanced.”

On Friday the three-year yield of the treasury bonds closed up 0.023 percentage points from the previous day at 1.736 percent. Interest rates have broken records for seven consecutive trading days. The situation is the same for other bonds, whether it would be those with five, 10, 20 or even 30 years’ maturity. In fact, interest rates of 10 year-maturity bonds in the 1.7 percent range rose to 2.1 percent as of Friday.

The U.S. 10-year bonds saw interest rates rise 0.08 percentage points after the announcement to 2.303 percent. This is a large increase considering that the interest on the 10-year U.S. treasuries was in the mid 1-percent range last month.

On the same day on the foreign exchange market the won depreciated to its lowest point in five months after adding 7.3 won from the previous day to close at 1,183.2 won against the greenback.

“Although the interest hike by the U.S. Federal Reserve has long been expected, unlike developed economies that expect a limited impact once the interest rate is raised, many emerging markets [including Korea], have shown worries,” said a Finance Ministry official.

Lee Ju-yeol, the Korean central bank governor, said Friday that the BOK will take action if it concludes that the instability will spread in the financial markets.

The BOK acquisition of 1.5 trillion won worth of bonds is almost double the size of its usual purchase. When the central bank purchases treasuries it usually focuses on those with 10-year maturity. But this time the Korean central bank is buying different maturities in a single move, an indicator that the BOK is hoping to lower interest rates as quickly as it can.

However, there are questions on whether the BOK’s purchase today will help ease the rising interest rates as it is a global trend starting with Trump and more recently Yellen. Market insiders say the move is not enough to cool the rising heat and the BOK’s purchase needs to be between 2 trillion won and 3 trillion won to see results.

“The market has seen the strong will of the BOK by the announcement,” said a bond dealer, who requested anonymity. “However, 1.5 trillion won is just not enough to change the situation.

“Whether the market will stabilize or not will be determined by [the BOK]’s additional moves.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]