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By Yi Whan-woo
The coupon rates of treasury bonds are falling below the key interest rate, stoking speculation that the Bank of Korea's (BOK) rate hike cycle ended with its latest decision, Jan. 13.
In particular, the longer the maturity of treasury bonds, the steeper their coupon rates fall, as owning treasury bonds for a longer period of time is likely to result in less profit.
The BOK hiked its policy rate to 3.5 percent on Jan. 13, up 25 basis points from its previous rate, which was set on Nov. 24, 2022. It marked the BOK's seventh straight hike since April 2021.
According to the latest data from the Korea Financial Investment Association, a non-profit and self-regulatory entity on the capital market, a three-year treasury bond offered a coupon rate of 3.39 percent as of Wednesday, was down from 3.782 percent on the first trading day of the New Year on Jan. 2.
During the Jan. 2-18 period, the coupon rate of a five-year treasury bond dropped to 3.353 percent from 3.809 percent. The 10-year treasury bond saw its respective rate sliding to 3.337 from 3.811 percent.
"The decrease in treasury bonds' coupon rate apparently suggests the debt market is likely embracing the possibility of a fall in the benchmark interest rate, although inflation still remains high above the BOK's target range of 2 percent," said Kim Myong-sil, a researcher at Hi Investment & Securities.
Inflation in Korea is anticipated to come down to around the 3 percent mark after hitting a 24-year-high of 5.1 percent last year.
Speaking on condition of anonymity, an asset manager said the Jan. 13 hike was perceived in the bond market as "something that was merely different from a freeze in the rate."
"The market sees the rate hike cycle is at its peak and that the BOK is poised to cut the rate in the coming months."
The asset manager noted that BOK Governor Rhee Chang-yong addressed the need to pay attention to the trade-off between managing inflation, economic growth and financial stability in monetary policy during a news conference, Wednesday.
Under these conditions, investors offloaded more than 2 trillion won worth of treasury bonds so far this year, and instead are buying other types of bonds, which still offer coupon rates higher than the BOK's policy rate.
Those bonds are issued by banks, non-banking private firms and state-run firms such as Korea Electric Power Corp. (KEPCO).
These bonds are usually priced at a nominal yield spread to a specific treasury bond that matches their respective maturity, as well as taking into account their credit ratings.
By type, investors purchased more than 8 trillion won worth of bonds issued by banks and more than 390 billion won in bonds issued by private companies.
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