Long-dated sovereign bonds across major economies — including the United States, Japan, and the United Kingdom — have hit levels unseen in two to three decades.
And Korean bonds rank among the worst performers, despite the country's inclusion in the FTSE World Government Bond Index (WGBI).
Korea's 10-year benchmark yield closed Tuesday at 4.210 percent, easing 2.9 basis points from Monday's annual high of 4.239 percent, narrowing the spread with the equivalent U.S. Treasury to just 36 basis points. The 10-year U.S. Treasury was trading at 4.608 percent as of 0545 GMT.
Unlike equities, Korean bonds have been battered by prolonged Middle East conflicts. The 10-year yield has surged more than 31 basis points since end-April and 85 basis points since December — outpacing a 22-basis-point rise late April and a 42.64-basis-point climb from December in equivalent U.S. Treasuries, and a 21-basis-point and 67-basis-point jump in Japanese government bonds over the same periods.
Concerns are mounting domestically that bond supply-and-demand conditions are deteriorating rapidly. Kang Seung-won, a fixed-income analyst at NH Investment & Securities, attributed the recent yield spike not to a simple sell-off but to a "buyer strike."
Investors, he said, are reluctant to aggressively buy bonds at a time when the government is expanding issuance, the economy is holding up better than expected, and the central bank has kept the door open to further tightening.
The government set its Treasury bond issuance volume for May at approximately 19 trillion won, up from the prior month. Market observers noted that despite improving prospects for tax revenue on the back of a semiconductor sector recovery, signals that the government intends to channel those resources into economic stimulus rather than fiscal consolidation have added further pressure to the bond market.
"Since the government has shown a stance averse to tightening, a sentiment appears to be spreading that additional Treasury issuances could be on the horizon," a bond market source said on condition of anonymity.
The global bond rout is compounding the pressure.
Global financial markets are also reassessing the return of so-called bond vigilantes — investors who protest runaway inflation and heavy government borrowing by selling bonds and driving yields higher. Analysts noted that anxiety intensified after U.S. Treasury Secretary Scott Bessent refrained from offering market-stabilizing assurances during the recent Treasury sell-off.
The won has mirrored the bond market's woes. The currency closed at 1,505.7 per dollar in Seoul on Tuesday, strengthening 7.4 won from the previous session, though it remains under sustained pressure. The won had briefly recovered to 1,470.5 on May 6 — buoyed by broad dollar weakness and a concentrated wave of exporter dollar-selling — but the rebound proved short-lived.
As Middle East risks re-escalated and pushed international crude prices back above $100 per barrel, safe-haven demand for the dollar reasserted itself. South Korea's heavy dependence on crude oil imports is seen as a key amplifier of won weakness: rising oil prices tend to push up import costs and widen the trade deficit, fueling further dollar demand among market participants.
Combined with the bond market's deterioration, fears of foreign capital outflows are growing. If the dual weakness in bonds and the currency — marked by simultaneous rises in long-term yields and the exchange rate — persists, broader domestic financial market volatility could escalate.
Copyright ⓒ Aju Press All rights reserved.