Affected by foreign investment buying, government bond yields partially declined... The 2-year government bond closed at 2.831%.

On January 5th, the first domestic bond issuance of 2026 took place. On that day, the South Korea bond market’s government bond yields rose across the board in the morning, but in the afternoon, due to foreign investors’ buy-in and capital inflows, some of the gains were recovered before closing. As the first bond issuance of the year, this day attracted the attention of bond market participants.

A 2.8 trillion KRW 2-year government bond auction was held on that day. During the bidding process, demand for short-term bonds was relatively weak, with the 2-year yield rising 3.9 basis points (1 basis point = 0.01 percentage points) from the previous trading day, closing at 2.831%. This was the largest increase among major maturity bonds. Conversely, the 3-year yield fell 0.2 basis points, closing at 2.933%, showing mixed movements within short-term bonds.

The 10-year government bond yield rose 1.0 basis point to 3.396%; the 5-year yield was 3.249% (up 1.0 basis point); the 20-year yield was 3.373% (up 2.0 basis points); and the 30-year and 50-year yields closed at 3.274% (up 1.9 basis points) and 3.173% (up 1.7 basis points), respectively. This upward movement in long-term bond yields is interpreted as the market still expecting interest rates to remain stable rather than signaling a shift toward rate cuts.

Market experts assess that the morning rise in yields was due to temporary supply and demand changes influenced by the government bond auction. Especially as global bond yields have recently shifted toward a lower likelihood of Federal Reserve rate cuts, domestic yields also faced upward pressure at the market open.

However, in the afternoon, as foreign investors began to buy mainly 3-year government bond futures, the market situation reversed. Foreigners net bought 1,376 contracts of 3-year government bond futures on that day, while net selling 3,475 contracts of the 10-year futures, indicating a strategy focused on short-term instruments. As a result, the intra-day rising yield levels partially retreated, and the market closed accordingly. Regarding the KRW exchange rate, the KRW appreciated by 2.0 against the USD from the previous trading day, closing at 1,443.8 KRW, which can also be interpreted as a signal of foreign capital inflow.

This week, the US will release key economic indicators such as manufacturing and non-manufacturing PMI, ADP employment change, and others. Market concerns are growing that these results could lead to increased volatility in global market interest rates and exchange rates. Based on this analysis, foreign investors, considering risk management, also engaged in some profit-taking and selling in the morning.

This trend indicates that, amid ongoing uncertainty regarding the Federal Reserve’s monetary policy direction, the Korean bond market may continue to experience fluctuations driven by short-term supply and demand and foreign buying and selling flows. It is expected that the market will remain sensitive to external variables such as US economic indicators and related monetary policy statements.