(Bloomberg) -- South Korea’s yield curve may steepen, as a deluge of new debt runs up against expected policy easing by the central bank in the first half of 2025.
Bank of Korea interest rate cuts, forecast as soon as January, are likely to drive down yields on shorter-dated securities — while factors such as record gross issuance to cover the government’s revenue shortfall and high US Treasury yields are set to elevate yields on the back end, according to analysts.
With the economy decelerating and the risk of new US tariffs looming, the South Korean government is planning to sell a record 201.3 trillion won ($142 billion) of new bonds in 2025, in part to replenish public coffers used to bridge gaps after tax receipts dropped. Officials may face further pressure to boost spending to safeguard growth after the political crisis eroded investor sentiment.
“The economy is slowing and BOK is likely to ease,” said Wee Khoon Chong, a strategist at BNY. “An easing cycle tends to have a curve-steeping effect.”
As much as 60% of Korea’s new bonds will be issued in the first half of next year, with the lion’s share in tenors of five years or more, the finance ministry said last week. At the same time, the swaps market is currently close to pricing in a full quarter-point interest-rate cut from the BOK in the next three months.
The short-lived martial law episode last week might curb the rise in long-term bond yields temporarily, delaying the curve’s steepening for about three to four months, said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities.
In the mid- to long term, Cho’s view continues to be that the short-term yield will fall more, and the long-term will fall less. He expects the yield gap between the nation’s three-year and 10-year bonds may widen by as much as 40 basis points next year.
Korea’s inclusion in FTSE Russell’s major global bond index in November 2025 is expected to provide some relief. Around $56 billion of fresh capital is estimated to be coming from abroad, according to Korea’s finance ministry.
Officials are likely to increase the proportion of long-dated Korean government bonds ahead of inclusion in the World Government Bond Index, Deutsche Bank AG’s Perry Kojodjojo wrote in a note.
The week’s main economic events:
- Monday, Dec. 9: China PPI, China CPI, Taiwan trade, Japan GDP, Japan current account balance
- Tuesday, Dec. 10: Australia cash rate, Australia NAB business confidence, China trade, Malaysia industrial production, Philippines trade
- Wednesday, Dec. 11: South Korea unemployment, Japan PPI
- Thursday, Dec. 12: Australia unemployment, Hong Kong industrial production, India CPI, India industrial production
- Friday, Dec. 13: Thailand gross international reserves, Japan Tankan manufacturing index, New Zealand BNZ manufacturing PMI
(Corrects weekly time reference in final section.)
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