The three-year Korean government bond yield jumped 8.8 basis points to 4.018 percent, crossing the 4 percent threshold for the first time since Nov. 1, 2023.
The yield had last closed above the level at 4.071 percent on Nov. 1, 2023, before falling to 3.979 percent the following day.
Selling pressure was broad across the Korean government bond market.
The benchmark 10-year yield climbed 10.0 basis points to 4.553 percent, while the 20-year yield rose 11.7 basis points to 4.665 percent, the largest increase among the key maturities tracked Friday.
The 10-year yield also reached its highest level since October 2022 as Korean bonds followed a sharp global selloff.
The South Korean won closed at 1,345.9 per U.S. dollar, weakening 6.7 won from the previous session.
Global bond yields surged as another jump in oil prices intensified concerns that inflation could remain elevated for longer and force central banks to tighten policy further.
Brent crude approached $110 a barrel Friday and was on course for an 11 percent weekly gain as escalating Middle East tensions threatened key energy shipping routes.
The oil shock pushed the U.S. 10-year Treasury yield as high as 4.979 percent, close to the psychologically important 5 percent level, while longer-dated yields also climbed to multi-year highs.
Higher U.S. yields fed directly into the Korean bond market, with the three-year yield particularly sensitive to expectations for the domestic policy-rate path.
Inflation concerns had already intensified after U.S. producer prices rose 0.4 percent in August from the previous month and 5.4 percent from a year earlier.
Several components feeding into the Federal Reserve's preferred Personal Consumption Expenditures price gauge also came in firm, pushing market expectations for a 25-basis-point Fed hike at next week's meeting to about 70 percent.
The European Central Bank added to the global repricing after raising its deposit rate by 25 basis points Thursday, while investors also remained concerned about heavy sovereign-debt supply and fiscal pressures across major economies.
Domestic monetary policy expectations offered little relief.
The Bank of Korea said in its September Monetary Policy Report Thursday that inflation was expected to remain above its 2 percent target for a prolonged period and that it would determine the timing and pace of further rate increases while monitoring inflation, growth and financial stability.
The BOK has raised its Base Rate at two consecutive meetings to 3.00 percent.
The combination of higher global yields and expectations for further domestic tightening drove the three-year yield sharply above 4 percent after it had ended Thursday at 3.930 percent. Thursday's close itself was already 2.0 basis points higher than the previous session.
The won came under pressure from the same combination of higher U.S. yields and oil prices.
A stronger dollar followed the rise in Treasury yields, while higher crude prices worsened the outlook for South Korea's import bill as an economy heavily dependent on imported energy.
Markets will next turn to U.S. consumer inflation data due Friday night in Korea, the final major inflation reading before the Federal Open Market Committee's Sept. 15-16 meeting.
A stronger-than-expected core reading could reinforce expectations for a Fed hike and keep upward pressure on both U.S. and Korean yields, while a softer reading could offer some relief after Friday's sharp selloff.
AJP Takeaways
- South Korea's three-year government bond yield jumped 8.8 basis points to 4.018 percent, closing above 4 percent for the first time since Nov. 1, 2023.
- The 10-year and 20-year yields also surged as oil prices near $110, higher U.S. Treasury yields and stronger global rate-hike expectations triggered broad bond selling.
- The South Korean won weakened 6.7 won to 1,345.9 per dollar, with markets now focused on U.S. CPI ahead of next week's Federal Reserve meeting.
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