Korean government bond futures rose on the morning of July 15 following the release of US June consumer price data that came in significantly below market expectations, sharply reducing the probability of a Federal Reserve rate hike this month. According to Yonhap Infomax, as of 9:15 AM on July 15, 3-year bond futures traded 15 ticks higher at 102.87, while 10-year bond futures rose 25 ticks to 105.30. Market participants noted that while the US CPI data supports a bullish outlook for Korean bonds, further gains may be limited due to the Bank of Korea Monetary Policy Committee meeting scheduled for the following day.
Korean Bond Futures Rise as Foreign Investors Net Sell Contracts
According to Yonhap Infomax, 3-year Korean government bond futures stood at 102.87 as of 9:15 AM on July 15, up 15 ticks from the previous session. 10-year bond futures traded at 105.30, rising 25 ticks. Foreign investors net sold 274 contracts of 3-year bond futures and 1,369 contracts of 10-year bond futures during the session.
US June CPI Falls 0.4% Month-Over-Month Below Forecasts
The US Department of Labor reported that June headline Consumer Price Index fell 0.4% month-over-month, marking the largest decline since April 2020 when it dropped 0.8%. The figure came in below the market forecast of a 0.1% decline. Core CPI remained flat month-over-month, also below the expected 0.2% increase.
Fed Rate Hike Probability Drops from 41.7% to 15.5%
Following the weaker-than-expected CPI data, the probability of a Federal Reserve rate hike this month declined sharply. According to CME FedWatch, the federal funds rate futures market showed a 15.5% probability of a rate increase this month, down from 41.7% the previous day.
US Treasury Yields Fall Following CPI Release
The New York bond market responded with a bull steepening reaction to the CPI data. Two-year US Treasury yields fell 8.8 basis points, while 10-year yields declined 3.3 basis points.
Trump Withdraws Hormuz Strait Tariff as Oil Prices Rise
Regarding the US-Iran conflict, US President Donald Trump announced the withdrawal of a 20% 'management fee' that was to be imposed on vessels transiting the Hormuz Strait. Despite this development, international oil prices rose modestly. West Texas Intermediate crude oil for August delivery closed the New York session at $79.34 per barrel, up 1.54% from the previous session.
Market Participants Cite BOK Meeting as Limiting Factor for Bond Rally
A bond dealer at a bank stated, "The fact that US inflation showed a fairly large month-over-month contraction appears meaningful," but added, "However, inflation indicators lag by one month, and currently the US-Iran conflict has intensified again with oil prices rising, so this is not an issue that would change direction." The dealer noted, "Given that tomorrow's Monetary Policy Committee meeting is scheduled and it's the first rate hike, it seems they will come out entirely hawkish, signaling the possibility of additional increases."
A bond dealer at a securities firm said, "The rally will be limited as tomorrow's Monetary Policy Committee meeting is expected to be hawkish," adding, "With the war intensifying, there doesn't seem to be much that would change the governor's logic."
FAQ
What caused Korean bond futures to rise on July 15?
Korean government bond futures rose on the morning of July 15 after US June CPI data showed a 0.4% month-over-month decline, significantly below the 0.1% decline forecast. This weaker inflation data reduced the probability of a Federal Reserve rate hike this month from 41.7% to 15.5% according to CME FedWatch, prompting a rally in both US and Korean bond markets.
How did US Treasury markets react to the June CPI release?
The New York bond market exhibited a bull steepening response to the June CPI data. Two-year US Treasury yields fell 8.8 basis points, while 10-year yields declined 3.3 basis points, reflecting reduced expectations for near-term Federal Reserve rate increases.
Why do market participants expect limited gains in Korean bonds despite positive US data?
Market participants cited the Bank of Korea Monetary Policy Committee meeting scheduled for the following day as a limiting factor. Bond dealers noted that the meeting is expected to produce hawkish commentary signaling potential additional rate increases, particularly given the ongoing US-Iran conflict and rising oil prices that could pressure inflation.
