"The Market Feared 3.75%, but the BOK Will Stop at 3.50%" [fn Market Watch]

[Financial News] Although the bond market has priced in room for the Bank of Korea's policy rate to rise as high as 3.75% amid a U.S.-led tightening shock, forecasts suggest that actual rate hikes will stop at 3.50%. Analysts say further tightening will become difficult after two additional hikes, expected in November and February next year, as the delayed costs of high interest rates begin to take effect.
Kang Seung-won, a researcher at NH Investment & Securities, said in a report titled "October: Compound Crisis and Triggers" on the 1st, "We are raising our forecast for South Korea's terminal rate to 3.50% to reflect an additional rate hike by the Federal Reserve System (Fed) in December," adding, "The additional hikes are expected in November and February next year." Regarding the 3.75% terminal rate that the won-denominated bond market has recently begun pricing in, he judged that "it is excessive at this point."
The bond market took the full impact of the U.S.-led tightening shock in September. The U.S. 10-year Treasury yield jumped 53.6 basis points over the month, closing at 5.2875% on September 30. The 10-year Korean Treasury yield also rose 10.5 basis points to 4.415%. Analysts attributed the increases to prolonged high oil prices, concerns that the Fed could raise its terminal rate, and simultaneous supply pressures from government and corporate bonds.
However, Kang said the room for further increases in U.S. yields would be limited. He placed the upper range for the U.S. 10-year yield at 5.3% to 5.6%. His explanation was that as long-term yields approach 5.3%, elevated market rates themselves could produce a tightening effect equivalent to further Fed policy rate hikes.
He also forecast that "the Fed will hold its policy rate steady in October, deliver one additional hike in December, and then shift to a hold stance." He added that concerns about additional hikes in 2027, currently priced into the market, would ease as the fourth quarter progresses.
Kang forecast that "the headwinds from rate hikes are highly likely to peak from late in the first quarter to early in the second quarter next year," adding that "the hiking cycle could enter its final phase after the second quarter next year."
He continued, "Since the September surge in rates was driven by an external shock, Korean Treasury yields are expected to move in tandem with U.S. rates for the time being," and predicted that "expectations for an additional Fed rate hike will ease during the fourth quarter, prompting an attempted pullback in U.S. yields."

[email protected] Kim Hyun-jung Reporter