The yield on the U.S. 10-year Treasury has surpassed the psychological barrier of 5%. Concerns over inflation and the widening U.S. budget deficit have contributed to a sharp rise in long-term interest rates, which has also led to an increase in South Korean government bond rates. As South Korea has proactively entered a cycle of interest rate hikes, the likelihood of the U.S. shifting to a tightening stance has raised expectations for continued upward pressure on domestic market rates.
According to the Korea Financial Investment Association, on September 15, the yield on the 3-year government bond rose by 6.6 basis points to 4.091%, marking a year-to-date high. The yield on the 10-year government bond closed at 4.600%. After a sharp increase following the outbreak of conflict in the Middle East, government bond rates had declined until August but have faced renewed upward pressure this month.
Recently, the pace of rising rates has accelerated, driven by increasing expectations for a rate hike by the U.S. Federal Reserve. On September 14, the yield on the U.S. 10-year Treasury reached 5.00% during trading and climbed to 5.012%. This marks the first time since October 2023 that the yield has exceeded 5%, and it is the second highest level since the global financial crisis in 2007.
The 10-year Treasury yield serves as a benchmark for determining borrowing costs for corporate bond issuers and significantly influences mortgage and student loan rates in the U.S.
The 5% threshold is considered a critical psychological barrier in financial markets. Since the U.S. 10-year Treasury yield acts as a benchmark for global long-term risk-free rates, surpassing this level could lead to increased upward pressure on corporate bonds and mortgage rates across the market.
The rise in Treasury yields reflects concerns over inflation in the U.S. and the potential for tightening by the Federal Reserve. As military conflicts between the U.S. and Iran resume, international oil prices have surged past $100, heightening inflation fears. Additionally, the increasing budget deficit in the U.S. has added to the supply burden of government bonds, contributing to the rise in long-term rates.
The increase in U.S. Treasury yields poses challenges for the domestic bond market in South Korea. Both short- and long-term South Korean government bond yields are on the rise, with the 3-year yield surpassing 4% on September 11 for the first time in nearly two years.
Higher government bond yields increase borrowing costs for businesses and households. Specifically, rising long-term rates can elevate the borrowing costs for corporate bonds, while loan rates tied to market rates, such as mortgages, may also face upward pressure. This could apply downward pressure on the prices of risk assets like stocks and real estate due to relatively higher discount rates.
The possibility of further rate hikes by the Bank of Korea (BOK) is another factor contributing to higher domestic bond yields. Following the BOK's shift to a tightening stance in July, expectations for sustained inflation due to prolonged high oil prices may lead to a longer-than-anticipated tightening cycle, which is reflected in market rates.
Particularly, as the BOK reassesses the potential growth rate (currently at 1.8%), the neutral interest rate may rise. An increase in the neutral rate would imply that the current tightening intensity of the benchmark rate at 3.50% is weaker than initially expected, raising the likelihood of additional rate hikes by the BOK, which could further exert upward pressure on government bond yields.
Kim Myung-sil, a researcher at iM Securities, stated, "If investments in semiconductors and artificial intelligence (AI) lead to productivity improvements and domestic recovery, next year's potential growth rate could be revised upward from the current range of 1% to 2.1% to 2.2%. Considering the rise in global real interest rates, the nominal neutral rate could increase from the previous 2.55% to between 2.8% and 3.1%." He added, "If the neutral rate rises, the tightening intensity of the current benchmark rate of 3.50% will weaken, making it possible for rates to remain unchanged until the end of next year or even into 2028."
Market experts anticipate that the final rate level in the BOK's tightening cycle will be 3.50%. Jo Yong-gu, a researcher at Shin Young Securities, noted, "The BOK is likely to reach the final rate more quickly than in the past and maintain a high-rate environment. Following an additional hike in November, the final rate is expected to reach 3.50% by February or April of next year."
* This article has been translated by AI.
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