Spotlight on the South Korean Market

It has been an eventful week for the South Korean market. Last Thursday, global financial market index provider FTSE Russell announced that it will add South Korean government bonds to its FTSE World Government Bond Index (WGBI) after years on its watchlist.

According to the announcement, the inclusion will take effect in November 2025, with South Korean bonds projected to hold a 2.22% weighting in the WGBI, based on market value. This would make South Korea the ninth-largest contributor to the index, a move expected to attract billions of dollars in foreign investment into the local bond markets.

Additionally, on Friday last week, the Bank of Korea (BOK) cut its key interest rate for the first time in 38 months to stimulate domestic spending, amid a recent slowdown in inflation. A majority of economists polled had anticipated BOK to reduce its key interest by 25 basis points to 3.25% on Friday. Most also believe this will be the only rate cut this year, as the BOK attempts to balance economic growth with financial stability.

This move follows a drop in consumer price inflation to 1.6% in September, falling below the government’s target of 2%. The market is currently pricing the expected reduction in the Korean Overnight Financing Repo Rate (KOFR) into the 1M (KRWKF1MOIS=TRDS) and 1W (KRWKFSWOIS=TRDS) tenors with the mid price within touching distance of the expected new benchmark rate.

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