The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at email@example.com. — Ed.
Supplementary budget concerns could spark an upturn in long-term KTB yields
The Korean government is likely to keep current social distancing rules in place amidÂ the continuing spread of COVID-19. Lowering social distancing levels seems risky givenÂ the typical increase in gatherings during end-of-year and new year holidays (includingÂ the Lunar New Year holiday at end-January). We believe prolonged social distancing willÂ further dampen consumer sentiment and negatively affect private consumption growthÂ through 1Q22. Given that consumer indicators could worsen towards February as a result,Â the central bank’s Monetary Policy Board (MPB) should find it relatively easier to raiseÂ the base rate to 1.25% at its January meeting instead of later in the year.
Regardless of the outcome of the upcoming presidential election, a supplementaryÂ spending plan that includes loss compensation for small-sized businesses will likelyÂ emerge as a key topic in discussions of additional measures to cope with the prolongedÂ impact of COVID-19. With further stimulus efforts to require a relatively bigger extraÂ budget, market concerns for a possible issuance of deficit-covering KTBs could drive upÂ long-term KTB yields going forward.
Base rate hike reflected in bond yields; short-term yields to stay relatively stable
Expectations for a base rate hike to 1.25% have already been reflected in bond yields.Â Even if an actual rate hike occurs in January, its impact on the bond market should beÂ limited as a result. Meanwhile, we expect to see rising concerns for an increase in KTBÂ issuance amid growing talks of a supplementary budget from January. Investors need toÂ be cautious of a possible upturn in long-term KTB yields towards the end of January.
For January 2022, we suggest a yield band of 1.70-1.85% for 3Y KTBs and 2.10-2.30%Â for 10Y KTBs. The 3Y-10Y yield spread should move within 40-45bp. With the Bank ofÂ Korea projected to adjust the pace of monetary policy normalization around the JanuaryMPB meeting, short-term KTB yields are likely to stabilize at lower levels. In contrast,Â long-term KTB yields are forecast to turn upward near the end of January on concernsÂ over an increase in KTB issuance to fund a supplementary budget. We thus recommend focusing on the relatively stable yields of short-term KTBs in January.