The likelihood of an additional interest rate hike by the Bank of Korea is increasing, which is expected to intensify upward pressure on government bond yields. Rising government bond yields can lead to higher market interest rates, increasing the cost of financing for both businesses and households. This is particularly concerning as companies face greater burdens from refinancing corporate bonds and financing costs for real estate project financing (PF) projects.
According to the Seoul bond market on August 23, the yield on three-year government bonds closed at 3.854%, up 4.3 basis points from the previous trading day. This marks a 9.6 basis point increase compared to the end of last month (3.758%). Yields on 10-year and 30-year bonds also rose, closing at 4.376% and 4.703%, respectively. Government bond yields are rising across all maturities.
The three-year yield is particularly sensitive to expectations regarding the benchmark interest rate and monetary policy. As the possibility of an additional rate hike at the Bank of Korea's monetary policy committee meeting on August 27 becomes more pronounced, upward pressure on yields is increasing.
The rise in three-year government bond yields also adds to the cost of financing for businesses. Corporate bond yields are determined by adding a credit risk premium to government bond yields. When government bond yields rise, even if credit spreads remain stable, the actual financing costs for companies increase. If the benchmark interest rate is also raised, additional upward pressure on market interest rates could further increase the financing burden on businesses.
The burden may grow during the refinancing process of corporate bonds issued at lower interest rates in the past. Companies will need to secure funding at higher rates than before, leading to increased interest costs. If interest rates continue to rise, companies with limited financial capacity may face greater refinancing burdens, restricting new investments and working capital.
The impact of rising interest rates could also extend to households and the real estate market. Increases in market interest rates, such as government bond yields, affect the borrowing costs for banks, which in turn can drive up mortgage rates. Higher loan rates increase the repayment burden on borrowers and may dampen demand for new housing.
As of August 19, the fixed-rate mortgage rates at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) ranged from 4.73% to 7.16%, already exceeding 7%. The financial bond yield for five-year bonds (non-guaranteed, AAA) reached a two-year high of 4.531% on July 27, contributing to the upward trend in financial bond yields. As of August 21, the yield remained high at 4.434%.
The real estate PF market is also vulnerable to rising bond yields. Given the high reliance on borrowing for PF projects, an increase in borrowing costs can lead to higher interest expenses and deteriorate project viability. Projects facing bridge loans or nearing maturity may experience greater financial burdens, complicating refinancing or transitions to main PF.
A financial industry official stated, "If government bond yields continue to rise from already high levels and the benchmark interest rate increases, market interest rates could rise further. This could increase the financing burden on businesses and households, and in vulnerable sectors like PF, it may lead to deteriorating financing conditions, raising caution in the market."
* This article has been translated by AI.
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