As global long-term interest rates rise, domestic government bond yields remain elevated. Despite the government's efforts to stabilize the market by reducing the issuance of government bonds, there are growing concerns that continued pressure from rising long-term rates in major economies could impact domestic interest rates, exchange rates, and the stock market.
According to the Korea Financial Investment Association, on October 6, the yield on three-year government bonds closed at 3.933%, down 0.4 basis points from the previous trading day. The yield on 10-year bonds rose by 0.4 basis points to 4.369%, while the 30-year bond yield increased by 1.3 basis points to 4.510%. This trend indicates a weakening of domestic long-term bonds in response to rising global long-term rates.
To stabilize government bond yields, the government has decided to adjust supply by reducing the total issuance of government bonds by 5 trillion won this month, utilizing excess tax revenue. While the authorities' commitment to market stability has somewhat eased upward pressure on mid- to short-term bond yields, the external factor of rising global long-term rates remains a burden.
Recent analyses suggest that the increase in global long-term rates is driven more by structural supply and demand changes than by expectations of monetary tightening. With rising energy prices intensifying inflationary pressures, the demand for funds due to expanded investments in artificial intelligence (AI) and increased fiscal spending in major economies are contributing to the growing burden of bond supply.
In the United States, concerns are rising that significant fiscal burdens could entrench long-term interest rate increases. According to the U.S. Treasury, as of October 1, the total national debt reached $40.242 trillion (approximately 5,402.5 trillion won), surpassing $40 trillion for the first time in August. The cumulative interest costs for the U.S. government in the 2026 fiscal year are estimated at about $1.27 trillion (approximately 1,705 trillion won), exceeding defense spending of $901 billion. This high-interest environment could exacerbate interest burdens and fiscal deficits, leading to further government bond issuance and a subsequent rise in long-term rates.
The expansion of AI investments is also pressuring the bond market's supply and demand dynamics. The need for substantial funding for data centers and power infrastructure has led to an increase in corporate bond issuance by major tech companies, further straining the bond market. The simultaneous rise in bond issuance by both the government and the private sector intensifies competition for investment funds.
Additionally, the reduction of overseas bond holdings by Japanese investors, a key player in the global bond market, is also having an impact. In August, Japan's sales of foreign bonds reached 1.1 trillion yen, the highest in five months. Sumitomo Mitsui DS Asset Management recently sold all of its French government bonds. This trend is attributed to rising Japanese government bond yields diminishing the appeal of overseas bond investments, coupled with the unwinding of yen carry trades.
The concern is that these trends may not be limited to rising domestic interest rates. Government bond yields serve as a benchmark for private sector rates, meaning prolonged high rates could increase funding costs for businesses and financial institutions. If risk-averse sentiment grows and credit spreads widen, the burden on companies could intensify. Households may also feel the impact of rising rates, as increased funding costs for banks could be reflected in higher loan interest rates.
Exchange rates and the stock market are also susceptible to the effects of rising long-term rates. Until recently, favorable supply conditions had led to a stronger won, but if adjustments in the U.S. Treasury market trigger a rapid flight to safety, there is a possibility of foreign capital outflows and a reversal in the won's strength. Rising rates could also increase discount rates for growth stocks, adding pressure to the domestic stock market.
According to Kang Hyun-joo, a senior researcher at the Capital Market Research Institute, "As government bond yields serve as benchmark rates for bank and corporate bonds, rising long-term rates lead to increased funding costs for the private sector. Vulnerable borrowers, such as marginal firms and self-employed individuals, should be cautious of potential declines in repayment capacity and rising delinquency rates."
* This article has been translated by AI.
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