Two-thirds of bond market participants expect rate hike at July BOK meeting

Two out of three bond market participants expect the Bank of Korea to raise its benchmark interest rate at the Monetary Policy Board meeting on Thursday, though expectations for a significant further rise in government bond yields have eased. Analysts also note growing investment appeal in ultra-long-term bonds, where yields have climbed more sharply than other maturities.

According to the Korea Financial Investment Association's "August 2026 Bond Market Indicators" report released Tuesday, 66 percent of survey respondents expect the Monetary Policy Board to raise the benchmark interest rate at this month's meeting. Another 34 percent forecast no change, and none predicted a cut.

In the previous survey — conducted ahead of the May Monetary Policy Board meeting — just 1 percent had expected a hike, while 99 percent forecast a hold. The association said the shift reflects the monetary authority's repeated signals of the need for a rate increase, set against consumer price growth running above the inflation target and an improving growth outlook.

Expectations for further gains in market rates such as government bond yields, however, have softened. The share of respondents forecasting higher market rates in August fell to 30 percent from 45 percent the previous month, a drop of 15 percentage points. Those expecting rates to hold steady rose to 56 percent from 39 percent over the same period, while those forecasting a decline edged down to 14 percent from 16 percent.

The results suggest the market views a rate hike as likely but believes it is already largely priced into government bond yields. Government bond yields reflect not only the benchmark rate but also expectations for future inflation and growth, the scale of government bond issuance, and supply-and-demand dynamics among institutional investors.

The composite Bond Market Sentiment Index, or BMSI, rose 1.1 points to 86.2 from 85.1 the previous month. A reading above 100 indicates that respondents expecting bond prices to rise and yields to fall outnumber those expecting the opposite, while a reading below 100 signals the reverse. The index remained below 100 but recovered slightly from the prior month as sentiment on inflation and the exchange rate improved.

The inflation BMSI surged to 99.0 from 50.0 the previous month. The share of respondents expecting consumer prices to rise fell to 19 percent from 52 percent, while those forecasting a decline rose to 18 percent from 2 percent. The association said the improvement reflected expectations for oil price stability following OPEC+'s decision to increase production.

The exchange rate BMSI also climbed, rising to 129.0 from 91.0. The share of respondents expecting the won-dollar rate to rise fell to 14 percent from 24 percent, while those forecasting a decline rose to 43 percent from 15 percent. The moves were driven by expectations of dollar inflows from a semiconductor boom and won strengthening after the foreign exchange market moved to around-the-clock trading.

Market analysts have also flagged growing investment appeal in 30-year government bonds. Their yields have risen more sharply than those of other maturities and overseas long-term bonds, driven by short-term funding demand amid heightened stock market volatility and a reduction in long-term bond holdings by insurers.

Lee Jae-hyeong, a researcher at Yuanta Securities Korea, said insurers and other long-term investors have less need to trim their long-term bond holdings in July than they did in June. "Because 30-year yields have risen more than other maturities, the interest income available to buyers at current levels is correspondingly higher," he said.

The survey was conducted from July 3 to July 8 among professionals involved in bond holding and management, drawing responses from 100 participants at 50 institutions.