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Treasury bond yield hits new low, gold price surges amid uncertainties

BOK chief’s hint at monetary easing further dampens bond market

Responding to mounting speculations that South Korea’s central bank may soon lower the policy rate amid uncertainties, Treasury bond interest rates hit a record-low this year, market observers noted Sunday.

Gold price, in contrast, has remained strong and hit a new high, reflecting investors’ increasing appetite for low-risk assets.

The yield on three-year Treasury bonds closed at 1.470 percent on Friday, marking the first case that the figure fell under 1.5 percent since November 2016, according to the Korea Financial Investment Association.

The bond interest rate has remained weak throughout the first half of this year as the escalating trade war between the United States and China has been weighing upon financial markets around the world.

The figure dropped below the 1.75 percent mark -- the current policy rate set by the Bank of Korea -- on April 24 and has since then been extending its downturn.

In early June, the Korea Capital Market Institute suggested in its report that the yield will linger narrowly above the 1.4 percent mark in the latter half of the year, should the US-China trade tension maintain status quo.

It was the BOK Gov. Lee Ju-yeol’s latest hint at monetary easing which sped up the depreciation of the Treasury bonds.

Bank of Korea Gov. Lee Ju-yeol. (Yonhap)
Bank of Korea Gov. Lee Ju-yeol. (Yonhap)

“As external uncertainties increased due to the trade dispute between the US and China, as well as the weakening semiconductor industry, (the BOK) should respond appropriately to deal with such changes in economic conditions while closely monitoring the developments,” Lee said Wednesday in a speech celebrating the 69th anniversary of the bank’s foundation.

This marked a clear departure from his previous stance of ruling out the immediate need to cut the policy rate -- by 25 basis points from the current 1.75 percent to 1.5 percent.

In May, the BOK’s Monetary Policy Board had once again frozen the benchmark rate, citing the country’s financial stability and macroeconomic conditions.

Following the BOK chief’s apparent change of policy stance, the three-year treasury bond yield flopped down to 1.469 percent, the lowest so far this year, nearing the record-low of 1.426 percent.

The bond yield trend for this week and the remaining part of the year will largely depend on the progress of the Washington-Beijing trade conflict, which will take some shape at the Group of 20 summit to be held in Japan’s Osaka on June 28-29, experts noted.

While most predicted the BOK’s incoming rate cut as early as in July, depending on the outcome of the G-20 summit, some even suggested that the central bank may carry out an additional rate cut by the end of the year.

“We may not rule out the possibility that the BOK may lower the policy rate twice during the second half of the year, in which case bond yields will fall further from the current level,” said Lee Geun-tae, a research fellow at LG Economic Research Institute.

In contrast, according to the Korea Exchange Gold Market, the price per gram reached 51,370 won ($43) on Friday, setting a new record since the market opened in March 2014. This outran the previous record of 50,910 won which had been observed on July 6, 2016, the day of the Brexit decision.

By Bae Hyun-jung (