US-Japan Interest Rate Tantrum, Direction of Korean Bond Market in the Second Half [fnMarketWatch]

[Financial News] As US and Japan interest rates surge due to Trump's tariff policy, long-term interest rates in our country are also rising. Although the focus is on the Bank of Korea's Monetary Policy Committee's base rate cut this month, experts believe there is still room for further long-term interest rate increases (bond price declines).
■ Korea-US Bond Synchronization... When the US jumps, Korea jumps too
According to the Bond Information Center on the 26th, the 10-year treasury bond yield rose from 2.593% per annum on the 2nd to 2.766% per annum on the 26th, jumping 17.3bp (1bp=0.01%p). The Korean treasury bond yield, which had been showing a decoupling phenomenon from US treasury bond yields, is now moving in sync with US treasury yields again. 
Previously, the 10-year US treasury bond yield rose to its highest in 24 years following last month's announcement of reciprocal tariffs. The 10-year US yield is moving at around 4.5% per annum. On the 22nd (local time), the Trump administration's large-scale tax cut plan passed the US House, causing the 30-year yield to surge and exceed 5% for the first time since October 2023. The uncertainty of tariff and fiscal policies has led to a sharp decline in the trustworthiness of US treasuries as safe assets, resulting in rising bond yields. The 30-year Japanese treasury bond yield is hitting record highs, expanding volatility in the bond market.
Experts are finding it complicated to calculate bond yield movements ahead of the Bank of Korea's base rate cut. Factors like rate cut materials (Monetary Policy Committee base rate cut), supplementary budget size, deficit bond issuance size, synchronization with US rates, and potential economic recession are interacting, creating mixed materials for rate increases and decreases.
■ Supplementary Budget Size (Rate Increase Material) vs Base Rate Cut (Rate Decrease Material)... Bond Direction
As US bond rates synchronize, the market is keenly focused on the supplementary budget size. Most securities bond analysts believe the Bank of Korea's Monetary Policy Committee will likely lower the base rate from 2.75% per annum to 2.50% on the 29th, but they also see room for further treasury yield increases. They believe the Nth supplementary budget and the new government's fiscal spending will act as upward pressure on rates. 
Jiman Kim, a researcher at Samsung Securities, said, "Regardless of the base rate, we should be wary of rate increase risks over the next 2-3 months," adding, "Factors leading to rate decreases, such as growth rate forecast declines, have already been significantly reflected in the bond market, and the uncertainty of fiscal spending changes and economic stimulus intensity after the new government takes office is the reason."
He continued, "With bond yields rising significantly in May (bond prices falling), it may seem like a good time to buy bonds again, but with continued foreign selling in the futures market, there is room for further rate increases."
Sanghoon Kim, a researcher at Hana Securities, said, "The size of the second supplementary budget this year and next year's budget proposal are key," adding, "Therefore, it is necessary to be cautious about expanding the proportion of long-term bonds until the materials are reflected."
On the other hand, there is also an opinion that the downward pressure on Korean treasury yields is actually stronger. Due to the fixation of low growth, the base rate is likely to fall to 2.0% per annum by the end of the year, resulting in bond yield direction inevitably pointing downward. 
Inseok Baek, a research fellow at the Capital Market Research Institute, said, "Our country has strong downward pressure on rates," adding, "The Bank of Korea is expected to lower rates to a sufficient level."
He continued, "Essentially, our country is in a phase of low growth fixation," adding, "Although rate volatility may temporarily increase, the likelihood of rates falling is high." 
In fact, Morgan Stanley projected in a report released on the 26th that "Korea will lower the base rate to around 2.0% by the end of 2025." 
Economist Kathleen Oh, in the report, expected the Bank of Korea to present "a GDP growth rate forecast of at least 40-50bp (1bp=0.01 percentage points) lower at 1.0-1.1%" in the 'Revised Economic Outlook.' Next year's forecast is also expected to be lowered to 1.5%.
■ Credit Market, Lower Grade Investment Sentiment Shrinks 
In this situation, there are also forecasts that the credit market in the second half of this year will not be easy. Sangman Kim, a researcher at Hana Securities, pointed out, "The balance of corporate bond issuance, which had been stagnant since 2021, has recently been increasing rapidly," adding, "The 14 domestic groups that recorded cash surpluses until 2020 have significantly expanded their cash shortages by increasing facility and equity investments since 2021." As a result, the net borrowing scale of the 14 major groups increased by about 70 trillion won compared to 2020, according to his explanation. These major groups include Samsung, SK, Hyundai Motor, LG, POSCO, Lotte, Hanwha, HD Hyundai, GS, Shinsegae, CJ, LS, Doosan, and Hyosung.
Furthermore, in a situation where internal and external uncertainties are amplifying, the investment sentiment for lower grades due to the Homeplus incident is inevitably shrinking.
Researcher Kim said, "Due to the Homeplus incident, the issuance balance of the lowest grade, BBB-, is almost extinct," adding that whether this avoidance of non-investment-grade bonds will transition to the BBB0 grade is a monitoring point.

khj91@fnnews.com Hyunjung Kim, Reporter