South Korea’s Index Inclusion Gives Bond Market a Lift

Catherine Bosley and Malavika Kaur Makol
3-min read

(Bloomberg) -- South Korean bonds got a boost thanks to the country’s surprise inclusion in a global index and growing bets that the central bank will lower interest rates this week.

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Futures on South Korea’s 10-year securities rose as much as 37 ticks, the most since Oct. 2, defying a widespread decline in government bonds around the world overnight. Futures on Korea’s three-year debt rose slightly, while the Korean won slipped 0.2%.

The moves came as the country returned from a public holiday, making Thursday the first time bond traders had a chance to respond to the inclusion of Korean notes in FTSE Russell’s World Government Bond Index, which should ultimately attract foreign inflows of between $56 billion and $70 billion, according to analysts at Barclays Plc and State Street Corp.

While Korea’s bonds will only join the benchmark from late 2025, the prospect of fresh capital is lifting the debt market ahead of the Bank of Korea’s hotly anticipated meeting on Friday, when it is expected to reduce interest rates.

There are only “modest downside risks” against Korea’s 10-year government bond yields heading toward 2.75% by the first quarter of next year, said Jennifer Kusuma, a senior Asia rates strategist at at Australia & New Zealand Banking Group Ltd. The incremental increase in foreign debt demand as a result of the index inclusion should help mitigate against the risk of rising bond supply in 2025, she added.

Yields on Korea’s 10-year notes are hovering around 3.1%, after declining over the last few months as investors shifted their interest-rate expectations.

Goldman Sachs Group Inc. strategist Danny Suwanapruti said the FTSE Russell announcement was likely a surprise to many in the market, after several banks had predicted the index revision probably wouldn’t be announced until next year. He said the move would provide a “slight tailwind” for both Korea’s government bonds and its currency.

The won will appreciate to between 1,320 to 1,330 per dollar on the back of the index inclusion, according to Kiyong Seong, an Asia macro strategist at Societe Generale SA. The currency traded at around 1,349 on Thursday.

FTSE Russell’s decision was a win for South Korea’s government, which had campaigned for inclusion and made changes to the local market to win the index provider’s approval. The changes included extending trading hours for the currency and making it easier for foreign investors to settle their trades through Euroclear, a Belgium-based clearing house.

Most economists expect the Bank of Korea to cut rates by a quarter-percentage-point on Friday, as signs of cooling in Seoul’s property market give the BOK the breathing room to join a widespread pivot to monetary easing among global central banks.

Korea’s low yields relative to the US have made the won one of the worst performing currencies in Asia this year, and global funds pulling money from the equity market have contributed to the weakness.

--With assistance from Masaki Kondo.

(Writes through with market open)

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