The domestic stock market suffered another significant drop due to a long-term bond shock, as interest rates in major countries like the United States and Japan reached their highest levels in decades. Concerns over the U.S. fiscal deficit and large corporate bond issuances by AI big tech companies have driven rates up, leading to a massive sell-off, particularly in semiconductor stocks. Samsung Electronics and SK Hynix fell by 7% and 9%, respectively. Experts believe this bond shock will persist for the time being.
Another Collapse for KOSPI
According to the Korea Exchange, the KOSPI index closed at 6,471.17, down 398.66 points (5.80%) from the previous trading day, marking the largest drop since July 29 (-5.98%). The index opened 341.06 points (4.96%) lower at 6,528.77 and plummeted to 6,400.81, a decline of 6.83% in early trading.
As the index fell sharply, a sell-side circuit breaker was triggered at 9:06 a.m. to temporarily halt program sell orders in the securities market. This was the 25th time this year that a sell-side circuit breaker was activated. Foreign and institutional investors sold a net 4.24 trillion won and 1.79 trillion won, respectively, contributing to the index's decline. Although individual investors bought a net 5.64 trillion won in a bid to capitalize on lower prices, it was insufficient to defend the index. The KOSDAQ index also closed down 9.74 points (1.17%) at 824.46.
Semiconductor Stocks Hit Hard by Bond Shock
The root cause of the stock market crash is the surge in long-term U.S. Treasury yields. In the New York bond market, the yield on the 30-year U.S. Treasury bond reached 5.33%, the highest level in 19 years since 2007. The benchmark 10-year Treasury yield also rose to around 4.75%. Meanwhile, Japan's 10-year bond yield surpassed 2.9%, setting a new 30-year high.
The sharp rise in long-term bond yields is primarily attributed to concerns over the massive U.S. fiscal deficit and increased supply of government bonds. With the national debt approaching $40 trillion, rising military expenditures due to the prolonged conflict in Iran and increased social security costs have led to a significant rise in the term premium demanded by the market.
Additionally, large-scale long-term corporate bond issuances by big tech companies for AI investments have added pressure to the bond market. Companies like Microsoft and Meta are increasing their issuance of long-term bonds to fund data center construction and AI semiconductor supply, competing with government bonds for financing.
The surge in long-term rates has raised concerns about increased borrowing costs for companies, impacting stocks in the semiconductor and AI value chain that had previously driven market gains. The Philadelphia Semiconductor Index fell 4.98% overnight, with Micron down 7.0%, and this trend carried over to the domestic market. On this day, Samsung Electronics (-7.82%) and SK Hynix (-9.75%) plummeted, while other major stocks like SK Square (-11.54%), Samsung Electro-Mechanics (-3.68%), and Hyundai Motor (-4.83%) also saw significant declines, leading the index lower.
Exchange Rate Drops to 1300 Won Level
Amid the panic in the stock market, the won-dollar exchange rate in the Seoul foreign exchange market fell to the 1300 won level for the first time in about 11 months. The exchange rate closed at 1,397.7 won, down 14.1 won from the previous trading day's weekly closing price. This is the first time the won-dollar rate has fallen below 1400 won since September of last year. The dollar's weakness is attributed to expectations that the U.S. Federal Reserve will not raise interest rates next month, along with an influx of dollar-selling from exporters contributing to the decline.
Market analysts believe that the impact of this interest rate shock will not be resolved quickly. Structural issues such as the fiscal deficit, debt, and inflation uncertainty are expected to support long-term rates, overshadowing short-term monetary policy variables. There are also concerns about the synchronization of U.S. and Japanese interest rates and the potential repatriation of Japanese funds.
Park Sang-hyun, a researcher at iM Securities, warned, "As Japanese bond yields surge and hedging costs increase due to yen depreciation, there is a growing possibility that funds from Japanese life insurance companies and pension funds invested overseas will return to Japan. If Japanese funds reduce or sell U.S. Treasury purchases, there is a risk of a repeat of the 'Truss Shock' that occurred in the UK in 2022 in global asset markets." Kim Gi-baek, a researcher at Shinhan Investment Corp, added, "The simultaneous rise in global long-term rates raises the discount rate for growth stocks and highlights the burden of corporate capital expenditures, halting any rebound in the stock market. The uncertainty in the bond market is likely to limit the upper range of the stock market for the time being."
* This article has been translated by AI.
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