The Bank of Korea raised its benchmark interest rate on the 16th for the first time in 3 years and 6 months, marking the start of a formal rate hike cycle. The bond market responded in the opposite direction, with short-term bonds showing notable strength as concerns over potential back-to-back rate increases diminished. Governor Shin Hyun-song's statement that policy would be 'data dependent' eased market fears of consecutive rate hikes in August, while the Seoul bond market also reflected recent US Treasury gains that had not been fully priced in during prior sessions.
Bank of Korea Implements First Rate Hike in Over Three Years
The Bank of Korea's Monetary Policy Committee raised the benchmark interest rate on the 16th, ending a 3-year-6-month pause on rate increases. The decision opened the door to a formal rate hike cycle, according to bond market participants.
Short-Term Bond Market Shows Strength Despite Rate Increase
Industrial Bank bonds with 1-year maturity traded 9-10 basis points lower than private assessment agency rates on the 16th. The 2-year bonds also circulated nearly 10 basis points lower, demonstrating steep gains for high-quality short-term bonds. General bank bonds with maturities under 2 years traded 3-6 basis points lower, though transaction volume remained modest. Market participants noted that the bullish sentiment for high-quality short-term bonds intensified particularly on this day.
Governor Shin's Data-Dependent Stance Reduces Consecutive Hike Concerns
Governor Shin Hyun-song stated the central bank would be 'data dependent' in its policy approach, alleviating market concerns about a potential back-to-back rate increase in August. The market had worried that the Bank of Korea might formally signal consecutive rate hikes next month. The statement provided relief that the worst-case scenario had been avoided, according to market analysts.
The Seoul bond market also belatedly reflected recent US Treasury strength. US Treasury 2-year yields fell 8.8 basis points on the 14th (local time), but Korea's 3-year government bond private assessment rates only dropped 2.3 basis points on the 15th, failing to fully reflect the move. Overnight, US Treasury 2-year yields declined an additional 6.1 basis points.
Woori Bank Issues 91-Day CD at 2.90% Amid Strong Demand
Prior to the Monetary Policy Committee's rate decision on the 16th, Woori Bank issued 220 billion won of 91-day certificates of deposit at 2.90%. The issuance rate matched the previous day's private assessment rate despite the expected benchmark rate increase. Substantial funds were raised at a level more than 12 basis points below the 3-month bank bond private assessment rate of 3.023%, confirming solid demand.
A bond dealer at a securities firm stated, "After seeing today's Monetary Policy Committee meeting, I think it's difficult to weaken further. It seems you can just buy bonds with maturities within 1.5 years." A bond broker at another securities firm explained, "In the case of Woori Bank's CD issuance, demand appears to have flowed in centered on repo funds that needed to fill cash assets as over 1.6 trillion won of CD maturities recently arrived."
FAQ
What did the Bank of Korea do on the 16th?
The Bank of Korea raised its benchmark interest rate on the 16th for the first time in 3 years and 6 months, starting a formal rate hike cycle.
Why did short-term bonds strengthen after the rate hike?
Short-term bonds strengthened because Governor Shin Hyun-song stated policy would be 'data dependent,' reducing market concerns about consecutive rate increases in August and providing relief that the worst-case scenario had been avoided.
How did Woori Bank's CD issuance perform on the 16th?
Woori Bank issued 220 billion won of 91-day certificates of deposit at 2.90%, matching the previous day's rate despite the expected rate increase, with strong demand from repo funds needing to fill cash assets after over 1.6 trillion won of CD maturities arrived.
