Regional markets have traded with wider variance this week amidst renewed geopolitical risks, higher oil prices, and diverging central bank policies. The most notable move has come from South Korea, where the Bank of Korea (BOK) delivered its first rate hike since 2023, citing inflation and FX stability concerns (see: Korea market section). Korean government bond (KTB) yields are staying on course with their upward march and steepening. The 3/10Y curve has steepened by 10bps this month to 47bps as investors are pricing in more hikes. There is room for bear flattening at this juncture. First, the 10Y-policy rate spread has already reached levels last seen in 2022 at155bps. The 3Y spread is, however, relatively compressed at 110bps, compared to the 2022 high of 204bps. Second, the equity market correction may curb the upside of long-end rates.
There is also a pay opportunity for KRW rates against CNY rates. The People’s Bank of China (PBOC) is likely staying on course with an accommodative monetary policy stance amidst weak domestic demand (see: China note). From a macro perspective, China's retail sales growth was sluggish at 1.0% YoY in June, while Korea's remains resilient at 5.6%. Consumer inflation in China and Korea also diverges, where China’s CPI only grows modestly at 1.0%. The Chinese central bank has hinted at using various monetary policy tools such as RRR cuts this week. Benchmark rate is expected to remain unchanged for the next 18 months. Bond market sentiment of the two markets is also heading into opposite directions - the bid-to-cover ratio for 3Y CGB is rising amidst tepid loan demand, while that of KTBs is plunging amidst the tightening path.
Within the Greater China region, pay opportunities are also seen in HKD rates against their CNY counterparts. The dollar-pegged HKD swap rates are heading higher alongside USD rates. The Hong Kong Government and other public entities are also gearing up to support infrastructure spending in the Northern Metropolis region.
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