Yields and Monetary Policy: A Shift in Influence

Since 2021, bond yields have predominantly been swayed by central banks' monetary policies and market expectations. With rate cuts already in motion, market rates are anticipated to fluctuate based on the disparity between the pace of cuts and market expectations. For Korea, the scope for cuts is narrower compared to the U.S., indicating fewer monetary policy options. However, we believe that yields will be more influenced by supply-demand factors, such as the record-high KTB issuances expected in 2025, large-scale credit bond issuances (early 2025), and an influx of funds tracking the WGBI (to start end-2025).

BoK's Rate Cut Strategy: Cautious Moves Ahead

As stated by BoK governor Chang-yong Rhee, the timing of rate cuts has been delayed due to growing household debt. There remains a possibility that any cut will drive real estate prices higher and increase household debt levels. However, the government's request for insurance/mutual finance companies and banks to curb household loans has raised the possibility of cuts in 1Q25. We expect the BoK to cut rates in 1Q25 and 3Q25, ending the year with a base rate of 2.75%.

Supply-Demand Dynamics: A Growing Concern

With growing recognition that the rate-cut cycle is poised to end, the fixed income market is facing unfavorable supply-demand dynamics. KTB yields have failed to increase, unlike U.S. treasury yields, which rose to reflect lowered expectations of U.S. rate cuts after Oct and potential for Donald Trump winning the presidential election. For the most part, anticipation of BoK rate cuts has been preemptively priced in because of weak economic fundamentals, unlike in the U.S. We anticipate KTB issuances to be burdensome next year, as they do not seem to be at year-end.

Corporate Bonds and Public Corporation Bonds: Maturities and New Issuances

Corporate bonds and public corporation bonds worth KRW49.7tn will mature in 1Q25. Also, new issuances (incl. for refinancing purposes) will increase. With the surge in bond yields in the wake of the Legoland scandal, companies in the past opted to take out bank loans over issuing corporate bonds. Recently, however, bond yields have fallen more quickly than bank lending rates. Thus, we see 1H25 issuances increasing YoY, but there are no clear buyers.

Investment Opportunities: Yield Rebounds and WGBI Inclusion

Investors should take advantage of yield rebounds as buying opportunities. Unlike in the U.S., weak economic fundamentals in Korea suggest a growing need for rate cuts. Unless household debt rebounds, the market should expect neutral rates to decline. Heading toward end-1H25, funds that will track the WGBI in Nov 2025 should support the upper range of yields. Savvy institutions may move to increase their proportion of bonds in anticipation for an influx of funds at end-1H25 because of WGBI inclusion.