(Bloomberg) — South Korean government bonds rose after the country was unexpectedly included in a global index and on growing expectations that the central bank will cut interest rates this week.
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South Korea’s 10-year bond futures ignored a broad overnight decline in government bonds and rose as much as 37 ticks, the highest since Oct. 2. South Korean three-year bond futures rose slightly, and the Korean won fell 0.2%.
The move comes as South Korea returns from a public holiday, giving bond traders a chance on Thursday to react for the first time to the inclusion of South Korean banknotes in the FTSE Russell World Government Bond Index. This should ultimately result in foreign capital inflows of $56 billion to $70. Analysts at Barclays and State Street put the number at $1 billion.
South Korean government bonds will not join the benchmark until the end of 2025, but the prospect of new funding is boosting the bond market ahead of Friday’s closely watched Bank of Korea meeting, where interest rates are expected to be cut.
Jennifer Kusuma, senior Asia rates strategist at Australia and New Zealand Banking Group, said there was only “slight downside risk” for South Korea’s 10-year government bond yield to head towards 2.75% by the first quarter of next year. said. He added that increased demand for external bonds through index inclusion will help reduce the risk of increased bond supply in 2025.
South Korea’s 10-year bond yield is hovering around 3.1% after falling in the past few months as investors’ interest rate expectations changed.
Goldman Sachs Group strategist Danny Swanapurthi said FTSE Russell’s announcement came as a surprise to many in the market, as banks had predicted that index revisions probably wouldn’t be announced until next year. Showed. He said the measure would provide a “slight tailwind” to both South Korean government bonds and the South Korean currency.
Kiyoung Sung, Asia macro strategist at Société Générale, said he expects the won to rise to 1,320-1,330 yen to the dollar after being included in the index. The currency traded at around 1,349 on Thursday.
FTSE Russell’s decision is a victory for the South Korean government, which has been making changes to the local market seeking inclusion to gain approval from index providers. The changes include extending the currency’s trading hours and making it easier for foreign investors to settle trades through Belgium-based clearing house Euroclear.
story continues
Most economists believe that the Bank of Korea will have a quarter of a million euros on Friday as signs of cooling in Seoul’s real estate market give room for the Bank of Korea to join the global central bank’s pivot to broader monetary easing. We expect the rate to be cut by 1 percentage point.
Lower yields in South Korea compared to the US have made the won one of Asia’s worst-performing currencies this year, and global funds pulling money out of the stock market has contributed to the won’s weakness. are.
–Thanks to Masaki Kondo for his assistance.
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