High house prices cause traders to bet against Korean bonds

(Bloomberg) – South Korean bond bears reaped a windfall as yields surged in September. Politics can prove to be an unlikely ally because it bets on more gains.

Monetary policy is shaping up to be a key issue heading into next year’s presidential election, with candidates to focus on ways to curb surging household debt, rising indebtedness and asset price bubbles. Traders see tightening, with swap markets factoring in more of an equal chance of a rate hike next month.

The country’s three-year yield jumped 20 basis points in September as its US counterpart climbed and the Bank of Korea signaled that interest rates could rise further. The hawkish tilt reflects the position of central banks in developed markets and could set the stage for other Asian policymakers to follow suit.

“Containing rising asset prices has been the Achilles heel of ruling and opposition parties,” said Shin Earl, fixed income analyst at SK Securities Co. “It seems to be growing. more than monetary policy is deployed to achieve their political objective. goals. ”

Yields on three-year government bonds could reach 1.75% by the end of the year, from around 1.70% currently, as traders anticipate another rise in interest rates, Cho said. Yong-gu, fixed income strategist at Shinyoung Securities Co.

Without a political debate, the 10-year yield could drop to 2.15% from the current 2.37%, Cho said. As it stands, the yield could drop to 2.45% instead, he added.

Bets for further tightening gained ground as a central bank board member said monetary policy remained accommodative after a quarter-percentage point hike in August, real interest rates are always negative. The Bank of Korea will host two more reviews this year: Tuesday and November 25.

Higher interest rates would complement the government’s efforts to curb household debt, which jumped 10.3% from a year earlier during the April-June period, the fastest pace since 2017. Key factor that drained support for President Moon Jae-in’s administration.

The opposition has weighed in on the issue as well, with a presidential candidate warning that debt levels are unsustainable and the housing market could be headed for a collapse.

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