The author is an analyst with NH Investment & Securities. He can be contacted at [email protected] – Ed.

Bets on foreign demand and policy failure, the main cause of the subdued response in US TB yields at the end of 2021, are likely to fade in January. On the flip side, KTB yields are likely to fluctuate at the current level, as uncertainties about further hikes will persist even after the BOK promulgates a hike in January.

Foreign demand and policy failure led to moderate response in US TB yields

The moderate response of US TB yield to the Fed’s stronger hawkish stance was driven by 1) favorable foreign demand and 2) fears of policy failure. However, since August, the proportion of bids from indirect bidders has steadily declined to less than 70%, which means that foreign demand has already peaked. In addition, given the degressive effects and the expansion of reverse repurchase agreements, the downward pressure on yields due to supply and demand issues will weaken.

Upward pressure on US TB yields to dominate in January

Although Omicron cases are increasing rapidly, the United States has not stepped up containment measures, while Europe has. In addition, in the context of a rebound in the economic surprise index, the recovery in employment is likely to accelerate with the end of advance payments of the child tax credit, which were an important part of the cash reserve. of a household. Concerns about policy failure are also likely to dissipate. As the drivers of US TB’s moderate yield response change course, US TB’s long-term yield will come under upward pressure in January.

Rising accommodative BOK will be offset by rising US TB yields

We expect the BOK to raise its key rate at the January MPC meeting. We note that amid lingering concerns about an economic slowdown (such as the PBoC likely to come up with additional easing policies in January), tighter social distancing measures are also a burden on the economy. So at least one MPC member will vote for a rate freeze and the continuation of the rate hike cycle will remain uncertain. However, the KTB market has already incorporated such notions. On the contrary, KTB yields will pause, focusing on the upward trend in US TB yields and additional budget issues. If the KTB yields increase, we stand by our buy recommendation, but there is no need to rush at this point.