Historical Context of Political Unrest Impact

Korea has recently faced political turmoil with President Yoon Suk Yeol's declaration of martial law, reminiscent of the 1979 crisis. We analyze the financial market impact of political unrest, comparing it to the impeachment of former President Park Geun-hye in 2016. During that period, yields on 3-year and 10-year Korean Treasury Bonds (KTBs) surged by 31 basis points and 52 basis points, respectively. However, the impeachment was not the sole driver; the unexpected victory of Donald Trump in the 2016 US presidential election also contributed to the market volatility.

Foreign investors significantly reduced their holdings in KTBs during the political unrest, both in the spot and futures markets. This trend began in early-October 2016 and continued until the impeachment bill was passed. The net buy of KTBs by foreign investors, which had reached up to KRW1 trillion by September 2016, plummeted to KRW30 billion in October and turned into a net sell of KRW980 billion in November. Post-impeachment, foreign net buy resumed, averaging KRW1.3 trillion until the presidential election in May 2017.

Liquidity Measures for Financial Stability

In response to the current political unrest, the government and the Bank of Korea (BOK) have taken prompt measures to stabilize the financial market. The BOK announced plans to provide liquidity through irregular repurchase agreement (RP) purchases, expanding the range of eligible institutions. This approach mirrors the successful stabilization of the short-term money market during the 2020 pandemic.

Given the ongoing rate cut cycle and measures for market stability, we do not anticipate financial unrest similar to 2016. The BOK is unlikely to alter its base rate policy. Financial market uncertainties are best addressed through liquidity measures, which the government and central bank have already initiated. With no further monetary easing or fiscal expansion expected in the near term, we predict that KTB yields will remain in the 2.4-2.8% range.