* Mid to long-term and high-quality bonds to fare well

Week in review: Yields declined led by mid to long-term bonds   

Despite the benchmark interest rate hike by Australia’s central bank, Korea’s bond yields held steady, buttressed by solid demand, at the start of the first week of March. The yields then took a downward path on the news that the leading economic index dipped MoM in January. Amid growing external uncertainties sparked by Greece’s debt crisis, the economy’s recovery appeared to take a breather and this worked to attract investors to the bond market. The bond yields fluctuated on rumors of an imminent major announcement by the Ministry of Knowledge Economy. As demand was growing for long-term bonds, falling yields accelerated led by five-year or longer maturity bonds. But the excessively low yields started to pull back and the pace of yield decline slowed.

Week ahead: Mid to long-term gov’t bonds and high-quality bonds to continue to fare well

Yields on bonds should keep sliding for some time. At this point, we see no clear upward momentum for the yields while there is wide perception that the Bank of Korea will keep the key interest rate unchanged. Demand for bonds should remain solid given abundant liquidity in the market and great uncertainties regarding real estate.

The Bank of Korea will likely freeze the key rate at the March Monetary Policy Committee meeting on Mar 11. The likelihood is not big that the government will hint at a monetary tightening given the lingering downside risks for the global economy. Furthermore, the upcoming monetary policy meeting will not draw much attention from market participants as the term of Governor Lee Sung-tae ends in March and two committee members’ terms expire in April.