Seoul bond market participants monitored US-Iran war developments and international oil prices on the 22nd, as June producer price index data showed flat month-over-month growth and the Bank of Korea assessed ongoing upward inflation pressure from Middle East conflict secondary effects. Foreign investors purchased approximately 26,000 three-year bond futures contracts over three trading days including the 16th, while interest rate swap forward rates estimated policy rates reaching 4.23% by October 25 next year compared to the current 2.75% level. The Bank of Korea released analysis indicating war-related uncertainty contributes to bond curve steepness beyond pure policy rate expectations, referencing Bank of England research published February 17 that separated UK bond curve movements into rate expectations versus risk premiums following the Iran war outbreak in February.
Foreign Investors Purchase 26,000 Bond Futures Contracts Over Three Days
Foreign investors bought approximately 26,000 three-year bond futures contracts over three trading days including the 16th, according to market data. The purchases occurred during a period when Asian bond markets including Australia and New Zealand showed overall strength, with mid-term government bond yields declining by 3 basis points in those markets.
IRS Forward Rates Project 4.23% by October 25 Next Year
Interest rate swap yield curve analysis tools showed three-month forward rates based on 91-day certificate of deposit rates estimated at 4.23% by October 25 next year, compared to the current policy rate of 2.75%. Domestic bond dealers and portfolio managers expect the terminal policy rate around 3.25%, creating a significant gap with the IRS curve projections. The analysis used Yonhap Infomax swap yield curve analysis tools.
Bank of England Research Separates Rate Expectations from Risk Premiums in Post-War Bond Curves
The Bank of England published a report on February 17 titled "Bank Rate expectations in the UK curve following the war in Iran" analyzing the gap between OIS forward curve implications and market participant consensus following the Iran war outbreak in February. The research decomposed the OIS curve path into "policy rate expectations" and "risk premium" components, finding that six-month premiums remained near zero during normal periods but spiked significantly during the 2022-2023 high inflation phase and immediately after the February Iran war. The report concluded that the upward-sloping curve observed in short-term segments immediately after the Iran war reflected compensation for short-term policy and economic uncertainty rather than pure policy rate scenario expectations. The six-month premium showed notable positive spikes only during high-inflation periods and the post-war period.
Bank of Korea Governor Shin Hyun-song stated last week at the Monetary Policy Committee meeting that core inflation trajectory depends on how monetary policy responds, saying "if monetary policy is used well, it will not remain above the target level for a long time" when asked about the timing of core inflation convergence to target.
FAQ
What did foreign investors do in the Seoul bond market over three days including the 16th?
Foreign investors purchased approximately 26,000 three-year bond futures contracts over three trading days including the 16th, according to market data.
What did the Bank of England research find about bond curve movements after the Iran war?
The Bank of England report published February 17 analyzed UK bond curves following the Iran war outbreak in February, separating movements into policy rate expectations and risk premiums. The research found that six-month premiums spiked significantly immediately after the war, concluding that upward-sloping curves in short-term segments reflected compensation for uncertainty rather than pure policy rate expectations.
