When the 2008-09 subprime mortgage crisis hit the United States, a great volume of global equity funds flowed into the South Korean bond market amid the widened gap between interest rates of the two countries.

But the current situation is reversing the trend as the rate gap has continued to narrow over the past few months, according to data from the Bank of Korea. The continued contraction stems mainly from the U.S.’ move to hike its benchmark rate and Korea’s expected monetary easing policy.

While the gap of earnings rate between Treasury bonds of Korea and the U.S. had ranged from 20 to 30 basis points, the figure recently narrowed to below 7 basis points.

As of June 2, the 10-year maturity Korean Treasury bonds were yielding 2.33 percent per annum, while that of the U.S. counterpart products reached 2.265 percent. The disparity stood at only 6.5 basis points.

This is drawing wide attention among market participants who are watching to see whether the two markets will see the earnings rates overturn. If it does, there is a high possibility that foreign investors could actively pull out their positions from Korea.

Their attention is initially focused on the BOK’s monetary policy committee meeting slated for Thursday. Despite the unfavorable scenario of a possible reversal, a few local analysts and economists have predicted a rate cut by 0.25 percentage points from 1.75 percent to 1.5 percent.

Aside from the lackluster exports, those betting on a rate cut are stressing that the consumer sentiment has critically frozen since the MERS outbreak hit the nation in late May.

Many market participants, in contrast, are forecasting that the U.S. Federal Open Market Committee will raise the key rate later this year.

The lower earnings rate on Korea’s Treasury bonds has sufficiently reflected the projections over the past couple of months that the BOK could lower the rate in June or July.

By Kim Yon-se (kys@heraldcorp.com)