Bond market sentiment improves in May as inflation and FX rise expectations ease

According to Financial News, expectations for higher inflation and a weaker currency have eased, leading to an improvement in bond market sentiment for next month.
In its "Bond Market Index for May 2026" released on the 8th, the Korea Financial Investment Association (KOFIA) reported that the overall Bond Market Sentiment Index (BMSI) for next month stood at 96.3, up 5.5 percentage points from the previous month.
The BMSI is an indicator of sentiment in the bond market. A reading of 100 or higher signals expectations for rising bond prices and falling interest rates, indicating favorable market sentiment.
Among survey respondents, 93% said the Bank of Korea (BOK) would keep its policy rate unchanged at the Monetary Policy Board meeting on the 10th. Only 6% expected a rate hike, while 1% anticipated a cut.
However, compared with the previous survey, the share of respondents expecting a rate increase has risen. This is seen as reflecting concerns about inflation driven by prolonged geopolitical risks in the Middle East, which have led to higher oil prices and a stronger dollar.
Bond market sentiment related to market interest rates came in at 102.0, improving from 99.0 a month earlier. Despite uncertainty in global bond markets, expectations of foreign capital inflows following Korea’s inclusion in the World Government Bond Index (WGBI) this month appear to have supported sentiment.
The share of respondents expecting higher interest rates was 23%, down 2 percentage points from the previous month. Those expecting lower rates rose to 25%, up 1 percentage point.
Inflation-related bond market sentiment also improved, reaching 81.0 compared with 50.0 in the prior month. Thirty-one percent of respondents expected higher inflation, down 19 percentage points, while the share expecting lower inflation rose to 12%, up 12 percentage points.
Although higher international oil prices are keeping upward inflation expectations in place, the government’s implementation of a price cap on petroleum products has led to an increase in respondents expecting lower inflation compared with the previous month.
Exchange-rate-related bond market sentiment also strengthened, rising to 95.0 from 80.0 a month earlier. With domestic and external factors such as the war in the Middle East overlapping, many participants appear to believe that, after the won–dollar rate recently climbed above 1,500 won, there is limited room for further gains.
In the survey, 24% of respondents expected the exchange rate to rise, while 19% anticipated a decline. The share forecasting a higher rate fell 11 percentage points from 35% the previous month, whereas those expecting a lower rate increased 4 percentage points from 15%.

jisseo@fnnews.com Seo Min-ji Reporter