[Son Ji-hyun's Bond Analysis] A Fiercer Search for Direction

(Seoul=Yonhap Infomax) Ahead of the November Monetary Policy Board meeting, the Seoul bond market is expected to see a further rise in wait-and-see sentiment.

Investor confidence is gradually improving, underpinned by robust buying from foreign investors in Treasury and Monetary Stabilization Bond (MSB) cash products, and from domestic institutions in short-term high-grade credit instruments.

However, whether this buying trend will persist hinges on the stance the Monetary Policy Board adopts at its November meeting.

Market yields, which had previously reflected rate hike concerns following Bank of Korea Governor Rhee Chang-yong’s remarks in a foreign media interview, have recently entered a correction phase. The yield on the three-year Treasury bond is fluctuating between 2.85% and 2.9%.

If the Monetary Policy Board alleviates concerns over further rate hikes, there is potential for yields to strengthen further from current levels.

While there are several factors to monitor—including the policy statement, any dissenting votes for a rate cut, forward guidance, and revised economic forecasts—the market’s primary focus is on what Governor Rhee will say at the press conference.

Depending on how Governor Rhee addresses his previous “policy shift” comments, which rattled the market, volatility could either increase or subside.

Concerns over the USD/KRW exchange rate are mounting. Late last week, the rate surged to the mid-1,470 won range, its highest level in about seven months since April.

Given the authorities’ vigilance against intervention, a further rise before the Monetary Policy Board meeting appears unlikely. However, if the rate stabilizes at current levels, it could prompt a more hawkish stance from the Board.

Beyond the exchange rate, most financial stability indicators—including last week’s real estate data—are signaling an unfavorable environment for bonds.

In this context, the Monetary Policy Board may be compelled to maintain a stance that does not open the door widely to future rate cuts.

In the US Treasury market late last week, dovish remarks from John Williams, President of the Federal Reserve Bank of New York, heightened expectations for a rate cut at the December Federal Open Market Committee (FOMC) meeting.

Speaking at the Central Bank of Chile’s centennial conference, Williams said, “I still see the possibility of adjusting the target range for the federal funds rate in the near term to move policy closer to neutral.”

He added, “Looking ahead, it is essential to return inflation to our 2% long-term goal on a sustained basis, but it is equally important to achieve this without creating excessive risks to our full employment objective.”

Williams, as Vice Chair of the FOMC, holds a permanent voting right.

However, Susan Collins, President of the Federal Reserve Bank of Boston, and Lorie Logan, President of the Federal Reserve Bank of Dallas, maintained a cautious stance on a December rate cut.

Reflecting these developments, the CME FedWatch Tool shows that the federal funds rate futures market has raised the probability of a December rate cut to around 70%, up sharply from about 40% previously.

With Federal Reserve officials entering a blackout period from November 29 ahead of the December FOMC, this week is the last opportunity to gauge policy signals. However, no major public speeches by Fed officials are scheduled this week.

Additionally, the US Treasury market will see 1.5 fewer trading days this week due to the Thanksgiving holiday on November 27.

On the previous trading day, the yield on the US 2-year Treasury fell 2.5 basis points to 3.5100%, while the 10-year yield dropped 2.1 basis points to 4.0650%.

This morning, a 5-year Treasury bond auction will be held for 2.8 trillion won ($2.1 billion).

(Market Team, Economic News Department)

jhson1@yna.co.kr

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