SOUTH KOREA: Bond Market Pressures Raise Risk of Hawkish Turn from BoK

Local market tumult persists in South Korea - and reduces the risk of another BoK rate cut, and raises the risk of a return of hawkish language across the rest of 2025.

• The front-end of the curve added as much as 11bps overnight, triggering a report in Yonhap that the government are "closely monitoring" bond yields, which they see as showing signs of excessive volatility. ( Yonhap article is here: https://news.einfomax.co.kr/news/articleView.html?idxno=4383595 ) The article makes reference to the 3-year yield hitting 2.96% for a new 2025 high.
• More importantly, the spread of the 3-year yield over the BoK base rate has risen sharply, and is nearing the highest levels in two years - a signal that market conditions are tightening despite the BoK insisting they remain in an easing cycle.
• Much of the market stress stems from Rhee pinning property price rises as "way above" expectations, and the optionality over the direction of policy ahead: "even the change of direction [of policy rates] will depend on the new data that we'll see".
• USDKRW edged off a new cycle high of 1470.10 overnight on Rhee's comments, and leaves a possible November rate cut as considerably less likely - particularly as November CPI isn't due until December 1st, just 4 days after the next BoK meeting.
• A conclusion of BoK easing and a hawkish outturn may not mean a reversal of KRW strength, however, which remains more closely tied to net foreign outflows from local equities: https://www.mnimarkets.com/articles/krw-suffers-on-foreign-outflow-reinforcing-link-with-risk-appetite-1762530364740