South Korean bonds slump as Fed rate hike consensus rises among policymakers

The South Korean government bonds closed lower Monday as the United States Federal Reserve rate hike speculation gathered steam following hawkish comments from the Fed policymakers. Also, Bloomberg’s implied portability for a rate hike increased to 30 percent for the September policy meeting, up from 25 percent calculated at the end of last week.

The 10-year bonds yield, which moves inversely to its price, rose 5-1/2 basis points to 1.565 percent and short-term 3-year bonds yield climbed nearly 3 basis points to 1.355 percent.

The United States Federal Reserve rate hike speculation gathered steam following hawkish comments from the Fed policymakers. Also, Bloomberg’s implied portability for a rate hike increased to 30 percent for the September policy meeting, up from 25 percent calculated at the end of last week.

Moreover, the Boston Federal Reserve President Eric Rosengren (a voter in 2016) said that he sees a reasonable case for gradual rate increases and a failure to continue the path of gradual rate normalisation could shorten the recovery; history shows the difficulty of slowing the economy after waiting too long to tighten policy.

He further added that payrolls growth has been somewhat choppy of late, but the United States economy is performing quite well, has proven resilient to international risks, and is at/close to full employment.

Additionally, Fed Governor Daniel Tarullo, speaking on CNBC, said that he will comment on the timing of Fed rate increases, but wouldnt foreclose the possibility of a rise this year. Also, would want evidence that inflation will rise and can be sustained at 2 percent and answer to low-rate risks isnt necessary to hike. On balance his remarks seem to be on the side of holding off from tightening policy.

In addition, Dallas Fed President Robert Steven Kaplan said that the case for a rate hike has strengthened in the last few months, but the Fed can afford to be patient because neutral rates are low. He further added that low rates create distortions/imbalances and the Fed will debate this over the next few months. The ISM reports a little more negative than expected and does not think the economy is overheating, he added.

Meanwhile, The Korea Composite Stock Price Index (KOSPI) ended 2.28 percent lower at 1,991.48 points.