Markets in honeymoon with Lee: Kospi, won rally; bond yields spike

South Korea’s financial markets showed strong gains on Thursday, with shares surging to an 11-month high and the won hitting a seven-month high as post-election optimism over the Lee Jae-myung administration drove renewed interest from foreign investors.

Expectations of economic stimulus measures, however, triggered a sharp repricing in the government debt market, as bond investors grew increasingly concerned over the scale of fiscal expansion and the potential impact on debt supply.

The Korean won opened the domestic session at 1,363.5 against the dollar on Thursday, compared with 1,369.5 the previous day’s close, and extended gains to close the Seoul market at 1,358.4, a seven-month high. The currency last traded at this level on Oct. 15, 2024, when the dollar/won rate briefly touched 1,355.9.

Currency traders attributed the won’s rally to the dollar’s broad pullback following weaker-than-expected US employment and services sector data.

The dollar index, which tracks the greenback against a basket of six major peers, slipped 0.5% overnight to 98.751, adding pressure to the US currency across Asia.

Sentiment was also buoyed by expectations surrounding Korea’s new government under President Lee, with investors betting that an anticipated fiscal boost and market-friendly policies could reinvigorate domestic growth.

Foreign funds have begun returning to Korean equities in recent sessions, further lifting the won, analysts said.

“Risk appetite is recovering and the market seems to be pricing in an early honeymoon effect under the new administration,” said a Seoul-based currency strategist. “President Lee’s policy signals suggest aggressive fiscal support, which is supportive for growth, and for the won.”

KOSPI SURGES PAST 2,800, LIFTED BY FOREIGN INFLOWS, POLICY HOPES

The country’s benchmark Kospi index surged past the psychologically significant 2,830 level on Thursday, marking an 11-month intraday high, as investors piled into equities on renewed optimism over the country’s new government and improving macro conditions.

On the second day of President Lee’s five-year term, the main bourse index jumped as much as 2% to hit 2,831.11, crossing the 2,800 threshold for the first time since July 19, 2024. The Kospi finished up 1.5% at 2,812.05 on Thursday after rising 2.66% the previous day.

By mid-morning, the Kospi was trading firmly above 2,800 after opening 0.7% higher, buoyed by robust demand from both foreign and institutional investors. Foreign buyers snapped up 916.6 billion won ($674 million) worth of shares on the main bourse, following net purchases of over 1 trillion won the previous day. Institutions added 280.8 billion won in net inflows on Thursday, extending their buying streak to two consecutive sessions. Retail investors, however, were net sellers, offloading 1.19 trillion won in shares.

The rally reflects growing confidence in the Lee administration’s economic agenda, which includes anticipated fiscal stimulus and pro-market reforms. Analysts say the new government’s policy direction, combined with a declining dollar and a firmer won, is creating a favorable environment for Korean equities.

“This is the first time in a year we’ve seen US-based funds flow back into Korean ETFs (equity-traded funds),” said Lee Kyung-min, a strategist at Daishin Securities Co. “It signals a structural improvement in the foreign demand cycle, helped by a stabilizing won-dollar exchange rate.”

Semiconductor heavyweights Samsung Electronics Co. and SK Hynix Inc. led the charge, gaining 2.3% and 3.2% respectively. Other notable gainers included Hanwha Aerospace Co., which closed 8.1% higher. Automakers Hyundai Motor Co. and Kia Corp. finished up 1.9% and 3.9%, respectively.

The tech-heavy Kosdaq index also posted gains, rising 0.8% to close at 756.23 on foreign and institutional buying.

Market participants said the rally could continue in the near term, although some analysts cautioned that short-term corrections are likely following the recent spikes.

Another strategist at a local brokerage said that the Kospi could test the 3,000-point level if the current momentum persists.

BOND YIELDS SPIKE ON EXPECTED ‘SUPER SUPPLEMENTARY BUDGET’

Bond investors, however, showed increasing concern over the scale of fiscal expansion and the potential impact on debt supply.

The yield on Korea’s three-year government bond jumped 7.4 basis points to an intraday high of 2.414%, the highest level since April 10. The increase also marked the largest single-day gain since Jan. 13, when a surprise hold in the Bank of Korea’s policy rate triggered a bond sell-off. The yield on the 3-year note closed at 2.412%.

Longer-dated maturities saw even steeper moves. On Wednesday, the yield on the 30-year note surged 13 basis points while the 10-year bond yield rose 10 basis points, much higher than the usual 3-basis-point moves.

Analysts pointed to the newly elected Lee government’s commitment to a sweeping supplementary budget – potentially as large as 35 trillion won – as the main driver behind the yield surge.

Market participants expect a significant portion of the government spending to be financed through fresh bond issuance, which could weigh heavily on supply-demand dynamics in the months ahead.

“There’s growing unease that the government may aggressively ramp up issuance,” said a fixed-income analyst at a local securities firm. “Talk of a 40 trillion won package is making the rounds, and that’s definitely unsettling the long end of the curve.”

During the campaign, President Lee pledged a supplementary budget of at least 30 trillion won to support households and small businesses still reeling from the effects of the pandemic and elevated inflation.

The BOK last week lowered its 2025 economic growth forecast to 0.8% from the previous 1.5%. The central bank reduced its policy rate by a quarter of a percentage point to 2.5% to support the faltering economy.

Market watchers said a formal supplementary budget bill could be submitted to Parliament as early as August.

“Markets are still in wait-and-see mode, but if the government confirms a package north of 35 trillion won with heavy reliance on bond financing, we’re likely to see more upward pressure on yields,” said a local brokerage strategist.

Write to Dong-Wook Jwa at leftking@hankyung.com

In-Soo Nam edited this article.