Fixed Income Strategy: Small Changes toward Improvement


The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. — Ed.

Supply-side burden to ease with no KTB issuance planned for second extra budget

We are now seeing small changes toward improvement in KTB market conditions, which had been weighed down by a series of negatives since the beginning of the year. At home, the supply-side burden in KTBs is expected to ease. Overseas, we are starting to pick up signs of curbing long-term inflation expectations in developed countries. Backed by the positive changes at home and abroad, 3Y and 10Y KTB yields dropped by more than 20bp from the previous peak recorded on May 4. The 10Y US Treasury yield has also fallen under 2.9% levels amid stabilizing inflation expectations.

The Yoon Suk-yeol government proposed a second extra budget of the year worth KRW59.4tr, of which KRW23tr will be allocated to local governments to shore up their finances and KRW36.4tr will be used by the central government. The government plans to finance the largest-ever supplementary budget without issuing deficit-covering KTBs, instead securing KRW8tr from last year’s net budget surplus and the Bank of Korea’s surplus, KRW7tr from the restructuring of government expenditures for this year and KRW44.3tr from excess tax revenue, which is estimated at KRW53.2tr. With no new KTB issuance planned for the second extra budget and 43% of the year’s issuance already completed through April, we are likely to see a relative decline in KTB supply in 2H22.

Going forward, the government plans to spend roughly KRW26tr to provide support for small businesses and KRW3tr to increase public welfare and stabilize prices. With the main focus placed on compensating for losses caused by the COVID-19 pandemic and supporting the underprivileged, the second extra budget is unlikely to create a boost for the economy while the inflow of over-KRW30tr could add to the inflationary pressure. The Bank of Korea, on its part, is likely to push ahead with another rate increase in May while keeping an eye on economic trends. In order to restore macroeconomic stability, the government and central bank will need to work closely together going forward. For the following week, we suggest a yield band of 2.85-3.00% for 3Y KTBs and 3.10-3.30% for 10Y KTBs. The 3Y-10Y yield spread should move within 25-30bp.

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