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| An unnamed foreign currency dealer in Hana Bank scratches his head, while the closing quotes of the KOSPI and won-dollar rate can be seen behind him, on Friday. The KOSPI lost 2.8 percent to close at 3,012.95 points, as investors' worries grew over post-COVID-19 inflation. The local currency closed at 1,123.6 won against the U.S. dollar, down 15.7 won from the previous session's close. Yonhap |
BOK plans to purchase 5 to 7 trillion won worth of government bonds by June
By Kim Yoo-chul
The South Korean stock market is feeling some pressure because Wall Street investors were apparently focusing more on the effects of a spike in the 10-year Treasury bond yield. But market analysts say rising yields and fears of inflation are signs of economic growth.
"I'd say you don't have to worry too much about the estimated impact of rising real yields and the fear of growing inflation on stocks. A rising 10-year U.S. Treasury bond yield should be interpreted as the market's hope of an economic recovery. Still, the country's stock market has room for further growth given ample liquidity," Kim Hyung-ryeol, chief of Kyobo Securities' research center, said Friday.
Despite U.S. Federal Reserve Chairman Jerome Powell's stance of downplaying the threat of inflation, with the Fed keeping its accommodative monetary policies and likely holding interest rates steady for some time to come, U.S. Treasury bond yields hit a new 52-week high as investors were apparently unconvinced.
Because the South Korean stock market shows a high correlation with major stock markets around the world, such growing fears of both inflation on Wall Street and a spike in bond yields ended up dragging down both the KOSPI and the junior KOSDAQ, which closed down more than 2 percent. The European and U.S. markets were in the red and the main Asian bourses followed that pattern in Friday's closing numbers.
"The South Korean stock market is expected to embrace a rise in U.S. bond yields as a negative factor in March. Amid momentum for economic growth, major South Korean exporters are looking good in terms of earnings improvement. However, the stock market will pay more attention to the effects of the rising U.S. bond yields," said the analyst.
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| Traders on the floor in this photo, provided by the New York Stock Exchange, Thursday. AP-Yonhap |
Inflation, based on expectations of economic growth, can either positively or negatively impact stocks, depending on the ability of investors to hedge against risks, along with the government's monetary policy. Higher inflation rates have been correlated with increased stock price volatility.
Regarding the possibility of major institutional investors rebalancing their stock portfolios, analysts say the stock market will see "limited volatility," because the recent spike in bond yields did not stem from the possibility of monetary tightening by the Fed.
"We maintain a 'positive view' for banking, industrial materials and IT stocks, because we think that the rising U.S. bond yields are an early reflection of investors' predictions of an economic recovery," Kim Dae-joon, an analyst at Korea Investment & Securities, said, adding that bond yields are rising because investors are optimistic about a sustainable economic recovery.
Partly, optimism among investors about the economic outlook has risen due to impressive vaccine development and continuous efforts by 120 countries around the world to inoculate their populations.
On Friday afternoon, the Bank of Korea (BOK) said it plans to buy between 5 and 7 trillion won worth of government bonds by June to possibly ease the volatility of interest rates in the financial markets.
"If necessary, the central bank plans to implement extra measures to stabilize financial markets upon surges in interest rates," the BOK said in a statement, adding that the date of the purchases and volume of the government bonds will be announced at the time of the official notification of the plan.
On a related note, Financial Supervisory Commission (FSC) Vice Chairman Doh Kyu-sang told policymakers that the watchdog is well aware of the growing fear of inflation because of rising bond yields in major economies such as the United States.
"We will closely monitor the possibility of widening asset price volatility. A recent spike in bond yields in major economies raised concerns that there would be a liquidity squeeze from China. The FSC does not rule out the possibility of widening asset price volatility," Doh said.
