Long-term interest rates in the United States and Japan have surged, raising alarms about funding conditions for domestic banks and companies in South Korea. The global bond sell-off has led to rising yields on government bonds, with increased pressure on bank and corporate bond rates. There are growing concerns that companies and financial institutions will face higher costs when refinancing maturing bonds.
According to the financial sector on September 2, the yield on U.S. 30-year Treasury bonds has surpassed 5.3%, reaching its highest level in nearly 19 years since 2007. Meanwhile, the yield on Japanese 10-year government bonds has hit 3% for the first time in about 30 years. This rise is attributed to increased government bond supply due to expanding fiscal deficits, inflation concerns, and uncertainties in monetary policy.
The increase in global long-term interest rates has also affected the domestic bond market. As of September 1, the yield on South Korean 10-year government bonds was recorded at 4.31%, while the 30-year bonds reached 4.53%. Compared to the 3-year bond yield of 3.84%, the upward pressure on long-term bonds is notably significant.
Domestic long-term interest rates are influenced not only by the Bank of Korea's base rate but also by U.S. Treasury yields and global bond supply and demand. Even if the Bank of Korea slows down or freezes its rate hikes, sustained high long-term rates in the U.S. and Japan could continue to push domestic market rates higher.
The Bank of Korea's ability to maneuver its monetary policy may also be constrained. In a prolonged period of high global interest rates, lowering rates could lead to a weaker won and increased outflows of foreign capital. Even if the base rate is adjusted, there is a possibility that it may not sufficiently lower long-term funding costs in the market.
Rising government bond yields are also impacting the issuance rates of bank bonds, corporate bonds, and asset-backed securities. Banks, companies, credit card firms, and capital companies may have to refinance maturing bonds at higher rates, leading to increased interest costs. The rise in banks' funding costs could result in higher loan rates, further burdening households and businesses.
Existing funding costs in the banking sector are also on the rise. According to the Korea Banks Association, the new COFIX (Cost of Funds Index) for July was 3.18%, an increase of 0.13 percentage points from the previous month. This marks four consecutive months of increases and is the highest level since December 2024.
Companies with lower credit ratings are particularly vulnerable to rising interest rates. The Financial Supervisory Service reported that in the first half of this year, the issuance of AAA-rated unsecured corporate bonds increased by 20% compared to the same period last year, while issuance of AA-rated bonds fell by 37.3%, A-rated by 40.8%, and BBB-rated by 55.5%. If market interest rates continue to rise, lower-rated companies may delay bond issuance or increase their reliance on short-term funding, exacerbating funding disparities.
Kim Dae-jong, a professor at Sejong University’s Business School, stated, “The rise in global long-term interest rates can increase banks' funding costs and loan rates, as well as corporate financing costs, potentially dampening investment and employment. If the rise in long-term rates persists, it could place a burden on both the financial market and the real economy, necessitating proactive measures.”
* This article has been translated by AI.
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