The winning yield on three-year Korean treasury bonds, a benchmark for the domestic bond market, has risen to the 4 percent range for the first time in three years and six months.
According to the Ministry of Finance and Economy on Wednesday, a competitive auction of three-year treasury bonds worth 2.8 trillion won held that day drew total bids of 7.437 trillion won, recording a bid-to-cover ratio of 2.66:1. The auction's ratio fell below both the previous month's figure (2.88:1) and last year's annual average ratio (2.77:1). The bid yield range was also 3.995 to 4.055 percent, higher than the market rate, while the winning yield reached 4 percent. Demand for treasury bond auctions has declined as market rates have recently jumped.
As the winning yield on three-year treasury bonds rose to the psychologically significant 4 percent range, the interest burden across the market, including households, companies and the financial sector, is expected to grow. The government's position is that it will flexibly adjust accepted volumes in future auctions while monitoring market rates and treasury bond supply-demand conditions. However, the market remains wary of high inflation caused by a prolonged Middle East war and the supply-demand pressure on government bonds that expansionary fiscal policy will bring.
This is the first time in three years and six months that the winning yield in a three-year treasury bond competitive auction has reached 4 percent, since December 2022 (4.25%), when market rates surged amid the COVID-19 shock. The market had largely anticipated the "3-year 4 percent era." The consumer price inflation rate has already surpassed 4 percent excluding the effect of the maximum oil price ceiling, and the possibility of a Bank of Korea base rate hike in the second half of this year is becoming a foregone conclusion as the Middle East war drags on.
Indeed, Bank of Korea Governor Shin Hyun-song hinted at the Monetary Policy Committee meeting held last month that a rate hike is not far off. "Whether looking at growth and prices or at exchange rates and real estate, the path ahead is relatively clear," Shin said. "We will raise the base rate going forward to manage various factors," he added, making the rate-hike stance clear. In response, the market expects rates to rise as early as the next Monetary Policy Committee meeting in July, and the possibility of an additional hike within the year is also being raised.
Reflecting this mood, three-year treasury bond yields have been surging day after day. Immediately after the government announced on May 28 that it would cut June treasury bond issuance by 4 trillion won, the three-year yield fell to the 3.73 percent range. But after reversing direction to 3.79 percent on the 1st of this month, it rose to as high as 3.96 percent during intraday trading on Wednesday.
The problem is that when three-year treasury bond yields jump, the burden on households and companies inevitably grows. The three-year treasury bond is a representative medium-term benchmark rate that serves as the basis for bank bonds as well as fixed-rate and hybrid mortgage loan rates.
"While 4 percent is not a historic high, the fact that the three-year treasury bond yield has hit the psychologically significant 4 percent range is a signal that the market is greatly concerned about Korea's inflation and fiscal deficit," a bond market official said. "When the benchmark three-year government bond yield rises, ordinary corporate bond yields and credit loan rates also rise one after another, inevitably increasing the burden on companies and households."
The government plans to adjust treasury bond issuance and auction volumes while monitoring market conditions going forward. Earlier, the government confirmed its June treasury bond issuance plan at 15 trillion won, down 4 trillion won from the previous month. The three-year bonds auctioned competitively that day also saw only 1.848 trillion won accepted, about 1 trillion won less than the scheduled volume (2.7 trillion won). "We will adjust accepted volumes going forward by comprehensively considering market rate trends and treasury bond supply-demand conditions," a Ministry of Finance and Economy official said.
However, bond experts are leaning toward the possibility of further increases in treasury bond yields. Although the government responded by adjusting issuance volume that day, the external environment is not favorable. "With Korea's solid economy and rising prices, combined with expectations of U.S. rate hikes, selling pressure will widen and the yield peak could climb higher," said Yoon Yeo-sam, research fellow at Meritz Securities.
