South Korean banks issued 91-day certificates of deposit at 2.91% on July 20, showing minimal response to the Bank of Korea's 25 basis point base rate increase to 2.75% announced last week. Kookmin Bank issued 200 billion won and Hana Bank issued 315 billion won at the same rate, according to data from Yonhap Infomax. Bond market analysts note that CD rate rigidity has intensified in recent months, with rates remaining largely unchanged even as comparable bank bond yields rose over 20 basis points during the same period. The phenomenon occurs as South Korea's financial markets transition toward adopting the Korea Overnight Financing Repo Rate (KOFR) as the benchmark by the end of 2030, replacing CD rates in that role.
CD Rates Remain Fixed Around 2.90-2.91% Through Rate Hike Period
The 91-day CD rate remained fixed around 2.81% from late April to late May, then rose sharply starting May 27 around the Monetary Policy Committee meeting. The rate peaked at 2.92% on June 11. After maintaining that high for approximately three weeks, the rate declined to 2.91% and 2.90% in July, showing no upward movement on the day of the rate hike itself.
Spread Between CD Rates and Bank Bonds Widens to Nearly 10 Basis Points
AAA-rated 3-month bank bonds and CD rates traded at similar levels as recently as early to mid-June, both around 2.9%. Bank bond rates subsequently climbed to 3.091% on July 1, rising over 20 basis points, while CD rates remained essentially unchanged at 2.90-2.91% during the same period. As of July 20, the AAA 3-month bank bond rate stood at 2.999%, compared to the 3-month treasury rate of 2.775%. The CD rate premium over treasuries measured 13.5 basis points, barely exceeding half the 22.4 basis point credit premium reflected in bank bonds. The spread between CD rates and the overnight indexed swap rate measured around 6 basis points, significantly narrower than the typical 20 basis point range.
Bond Dealers Attribute Rigidity to Benchmark Transition Period
A bond dealer at a securities firm stated that CD rates represent bank credit while OIS reflects risk-free overnight repo rates, questioning why the credit spread for extending maturity would be so minimal. The dealer noted that CD rates showed no movement even when the commercial paper market experienced turmoil last month and short-term bank bonds traded at low prices. Another dealer characterized the rigidity as intensified compared to previous cycles, noting that CD rates typically pre-reflect 60-70% of an expected rate increase before the official hike, with the remainder incorporated afterward. This time, bank bonds with maturities within the year pre-reflected increases of 25-50 basis points, while CD rates rose only modestly by comparison. The dealer identified two factors contributing to enhanced rigidity: the transitional period before CD rates lose benchmark status at the end of 2030 in favor of KOFR, and the continued reluctance of securities firms posting CD rates to actively reflect rate movements despite revised disclosure regulations. A third dealer confirmed that CD rates trading 10-15 basis points above the base rate represents the long-term average, but emphasized that during rate hike cycles, term rates naturally rise more sharply in anticipation of multiple increases, suggesting current CD rate levels appear too low.
FAQ
What rate did South Korean banks set for 91-day CDs on July 20?
Kookmin Bank and Hana Bank both issued 91-day certificates of deposit at 2.91% on July 20.
How does the current CD rate spread compare to bank bonds?
As of July 20, CD rates traded 13.5 basis points above 3-month treasuries, while AAA 3-month bank bonds traded 22.4 basis points above treasuries—meaning CD rates reflect barely half the credit premium shown in bank bonds.
