South Korea’s 10Y Yield Rises After BoK Decision

South Korea’s 10-year government bond yield rose to around 4.16% in late May, moving back toward its highest level since November 2023, after the central bank held rates steady but signaled a more hawkish tilt. The Bank of Korea raised its inflation outlook for this year to 2.7%, up from 2.2% in February, citing higher energy costs following disruptions linked to the Iran conflict. Meanwhile, policymakers also lifted the 2026 growth forecast to 2.6% from 2%, reflecting a stronger-than-expected Q1 GDP growth, driven by booming global demand tied to artificial intelligence powering semiconductors. Against this backdrop, the central bank’s dot plot for policy rates six months ahead showed a clear hawkish shift, with two members projecting rates as high as 3.25% in risk scenarios. Most projections clustered around 3%, pointing to expectations of roughly two additional rate hikes over the coming half year.

South Korea’s 10-year government bond yield climbed to around 4.27% in mid-May, reaching its highest level since November 2023, driven by rising expectations of aggressive Bank of Korea rate hikes. The repricing reflects mounting inflation pressures, with headline inflation rising to 2.6% in April, the highest since July 2024, amid an oil shock linked to the Iran conflict. Stronger growth prospects, supported by an AI-driven semiconductor upcycle, have reinforced the hawkish shift, with Q1 GDP expanding 1.7% quarter-on-quarter, the fastest in five years. This combination has prompted major brokerages to turn more hawkish on the policy outlook, with most now expecting rate hikes this year or next, reversing earlier views that rates would remain on hold. Attention now turned to the upcoming policy meeting later this month for further guidance, the first since the departure of Shin Sung Hwan, a noted dove on the board, leaving the policy panel perceived as more hawkish.

South Korea’s 10-year government bond yield fell to around 3.65% in early April, hitting its lowest in five weeks, after the US, Iran, and Israel agreed to a two-week ceasefire to allow negotiations toward ending the war. President Donald Trump delayed planned strikes on Iranian civilian infrastructure for two weeks, calling it a “double-sided ceasefire,” with Iran reopening the Strait of Hormuz and Israel pausing hostilities. The move eased market tensions, sending oil prices lower and reducing some inflation concerns. Meanwhile, the Bank of Korea is expected to keep its key rate at 2.50% later this week, with analysts anticipating a cautious policy stance as it assesses the war’s impact on inflation and growth. South Korea, the world’s fourth-largest oil importer, sources about 70% of its supply from the Gulf.