M&G Backs Korean Bond Market Rally: Are Rate Hike Fears Overdone?

M&G Investments is betting on a rally in South Korean government bonds, arguing the Bank of Korea (BOK) will slow its rate hike cycle even as most investors brace for more tightening.

M&G is a London-based global asset manager listed on the FTSE 100, overseeing more than £300 billion for pension funds, insurers and other institutional clients worldwide.

A Central Bank Leaning Hawkish

The BOK raised its benchmark rate a quarter point to 2.75% in July, its first rate hike since early 2023, after growth and inflation data ran hotter than expected. South Korea’s economy expanded 0.6% in the second quarter, and consumer prices rose 2.8% in July, still above the central bank’s 2% target.

Outgoing senior deputy governor Ryoo Sangdai said last week that further hikes remain likely, with policymakers weighing core inflation, growth momentum and financial stability risks ahead of the BOK’s Aug. 27 policy meeting.

Ryoo downplayed the recent won stabilization and a KOSPI pullback as factors for the board, saying inflation trends will carry far more weight in the decision.

“The scale of the increase may not be large, but it could be persistent.”— Ryoo

M&G Sees an AI-Fueled Bond Rally Incoming

Even with this hawkish leaning, Low Guan Yi, M&G’s head of Asia fixed income in Singapore, argues the market’s rate hike bets have gone too far. She points to a semiconductor-driven tax windfall from Korean chipmakers and hardware suppliers, which should let Seoul cut back on bond issuance and tighten supply.

“We believe the Korean bond yield curve has priced in too many rate hikes.”— Low

M&G has added to its Korean government bond holdings over the past two months, betting that the tighter supply outlook offsets the central bank’s hawkish signals.

The call comes as foreign investors pull back. Bloomberg reported that net foreign selling of Korean government bonds hit about $1.2 billion in July, the highest level since February 2025, pushing the 10-year yield up 22 basis points since the end of June.

That bond weakness follows a rough stretch for Korean risk assets, including the country’s worst KOSPI crash since 2008 earlier this month.

What Comes Next

Whether M&G’s call pays off hinges on the BOK’s Aug. 27 decision. A slower pace of hikes would validate the firm’s bond bet and support a rebound in Korean Treasury Bond prices.

A fourth straight increase, on the other hand, would vindicate the hawkish pricing in swap markets that Low argues has already gone too far.