Treasury Yields Surge as BOK Launches 3 Trillion Won Bond Purchase

South Korean government bond yields are surging amid inflation concerns driven by soaring international oil prices. As foreign investors dump holdings to cut losses, the Bank of Korea is stepping in with a 3 trillion won ($2.1 billion) outright purchase of treasury bonds.

According to the Korea Financial Investment Association on the 9th, the 3-year treasury bond yield jumped 19.3 basis points to 3.420% per annum, reaching its highest level in one year and nine months since June 2024. The 5-year yield rose 18 basis points to 3.652%, while the 10-year yield climbed 12.3 basis points to 3.739%. The spread between the 3-year treasury yield and the benchmark interest rate of 2.5% has reached 0.92 percentage points, approaching 1 percentage point. This is the highest level since November 2022, when market rates spiked during the Legoland crisis.

Analysts say inflation fears from surging oil prices are driving bond yields higher, triggering a wave of sell orders that push rates even further up. Foreign investors sold approximately 40,000 contracts of 3-year treasury futures on the day, approaching the all-time record of roughly 45,000 contracts set on October 2, 2014. A bond dealer at one securities firm said, "Loss-cutting orders are coming in rapidly as Korea's particular vulnerability to oil price spikes comes into focus."

To stabilize the panicked market, the Bank of Korea announced it would conduct a 3 trillion won outright purchase of treasury bonds. The operation will target 3-year, 5-year, and 10-year maturities, with a 10-minute purchase auction starting at 11 a.m. on the 10th.

An outright purchase involves the central bank buying government bonds directly from the market. This improves supply-demand conditions and helps lower bond yields. The BOK previously purchased 3 trillion won in treasury bonds in September 2022 when yields spiked during the Legoland crisis.

If inflation materializes, the BOK could move up the timing of rate hikes. Citi stated in a report on the day, "If inflation pressure exceeds the target by 1 percentage point, the BOK may consider raising interest rates."