South Korea's stimulus plan may push up bond yields

As the global economic situation continues to change, the South Korean government has launched a series of stimulus plans to cope with the pressure of economic slowdown. However, these plans may bring unexpected side effects, one of which is to push up bond yields.

South Korea's economic stimulus plan aims to boost domestic demand, support corporate development and promote employment by increasing government spending. Recently, the Ministry of Finance of South Korea announced that it will increase infrastructure investment and introduce tax incentives to encourage corporate investment and consumption growth. However, large-scale fiscal spending often requires corresponding financial support, and treasury bond issuance is an important way. As the supply of government bonds increases, the supply and demand relationship of bonds in the market will change, which may lead to a decline in bond prices, thereby pushing up bond yields.

In recent years, due to the impact of the global epidemic and the adjustment of the Federal Reserve's monetary policy, South Korea's bond market has experienced a lot of fluctuations. In 2022, South Korean treasury bond yields rose across the board, with the three-year treasury bond yield rising to 3.127% and the five-year treasury bond yield rising to 3.364%. This trend reflects the market's expectation of rising interest rates in the future, and the implementation of the stimulus plan may further strengthen this expectation. The market generally believes that in order to cope with the inflationary pressure brought by the stimulus plan, the Bank of Korea may adopt a tougher monetary policy stance, including measures such as raising interest rates.

In addition, South Korea's high household debt level is also an important factor affecting the bond market. The chief nominee of the Bank of Korea has hinted at raising interest rates to curb household debt, as the large-scale fiscal stimulus plan may further push up the borrowing demand of households and businesses. If the market expects interest rates to rise in the future, investors will now demand higher bond yields to compensate for future interest rate risks. This will cause bond prices to fall and yields to rise.

Historical experience also shows that large-scale government stimulus plans tend to push up bond yields. For example, after Trump was elected as the US president, the market's uncertainty about future policies increased, causing emerging market bond yields, including South Korea, to rise sharply. Analysts pointed out that if the stimulus plan leads to increased market concerns about inflation or changes in expectations for future economic growth, bond yields may rise further.

The South Korean government was also aware of this risk when formulating the stimulus plan and tried to balance the market impact through various measures. For example, the Ministry of Finance has said that it will closely monitor the treasury bond market and respond to changes in the market situation in advance by actively coordinating with the Bank of Korea when necessary. In addition, the Bank of Korea also stated that it would reduce the issuance of monetary bonds to ease market pressure. However, whether these measures can effectively alleviate the rise in bond yields still needs to observe the market's reaction.

For investors, the rise in bond yields brought about by the Korean stimulus plan has both opportunities and risks. On the one hand, higher bond yields mean higher investment returns, which has attracted the attention of some investors; on the other hand, if the yield rises too quickly, it may lead to increased volatility in the bond market and even cause market panic. Therefore, investors need to carefully assess risks and allocate assets reasonably.

In summary, while boosting the economy, the Korean stimulus plan may also push up bond yields by increasing bond supply, raising market interest rate expectations, and increasing household and corporate debt burdens. The Korean government and the central bank need to take effective market regulation measures to balance the relationship between economic stimulus and financial market stability. For investors, it is necessary to find the best balance between risk and return.