South Korea 3-Year Bond Yield Rises to Highest Since November 2023 on Big-Step Rate Bets

South Korean government bond yields climbed to their highest level in two years and seven months as markets priced in the possibility that the Bank of Korea could deliver a 50-basis-point rate increase next month. Surging consumer prices and a sharp rise in the won-dollar exchange rate fueled those bets.

The yield on three-year government bonds rose 8.5 basis points from the previous session to 3.858% on June 4, according to the Korea Financial Investment Association. That was the highest level since Nov. 13, 2023, when the yield was 3.877%. A large part of the increase came from heavy selling of government bond futures by foreign investors. They were net sellers of about 18,000 contracts, equivalent to roughly 1.8 trillion won in face value. It was the first time they had turned net sellers in nine trading sessions since May 20.

The foreign selling reflected concern that the BOK may raise rates faster than expected. Consumer inflation rose 3.1% last month, topping 3% for the first time since March 2024, in the aftermath of the war in the Middle East. The won-dollar exchange rate also finished above 1,500 won per dollar for 13 straight trading sessions on a weekly closing basis through June 4. Forecasts from domestic and overseas institutions that put this year's economic growth at 2.6% to 3.0%, above potential growth, also added pressure.

In the bond market, investors are discussing the possibility that the BOK could raise rates in both next month and August, or opt for a 50-basis-point increase next month. Yoon Yeo-sam, an analyst at Meritz Securities, said the won has stayed above 1,500 per dollar for an extended period, while inflation and growth have both remained stronger than expected. Markets have also begun to price in the possibility of three to four rate increases this year, he added.

Kim Ik-hwan and Shim Sung-mi, Hankyung.com reporters

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