U.S. Treasury yields have surged to their highest levels in years, marking a new phase in the global financial market characterized by high interest rates. Factors such as fiscal deficits, rising international oil prices, and expectations of further interest rate hikes by the Federal Reserve are expected to keep U.S. Treasury yields elevated, which could also impact domestic bond rates and the won-dollar exchange rate.
According to data from the Federal Reserve Bank of St. Louis (FRED), the yield on the benchmark 10-year U.S. Treasury bond exceeded 5.18% on September 24, reaching its highest level since 2007. The sell-off in bonds has been driven by inflation concerns stemming from rising oil prices, the U.S. government's fiscal deficit, increased demand for funds due to investments in artificial intelligence (AI), and expectations of additional rate hikes by the Federal Reserve.
The sharp rise in U.S. Treasury yields is likely to increase pressure on the domestic bond market. The yield on three-year government bonds closed at 4.014% on September 11, the highest level in two years and ten months since November 1, 2023 (4.065%), and has remained around 4% leading up to the Chuseok holiday. In this context, the surge in U.S. Treasury yields could exert upward pressure on South Korean government bond yields.
Kim Sang-man, a researcher at Hana Securities, stated, "The yield has surpassed 4% for the first time in nearly three years due to factors such as rising oil prices. The widening interest rate gap between South Korea and the U.S. has raised expectations for higher final rates in Korea, leading to bearish pressure on short-term bonds."
Expectations that the Bank of Korea will raise interest rates further also appear to support government bond yields. The Bank of Korea raised its benchmark interest rate to 3.00% in July and August. The market anticipates additional rate hikes by the Bank of Korea within the year, with some estimating the final rate in this tightening cycle could reach 3.75%.
The rise in U.S. Treasury yields and international oil prices is expected to increase volatility in the exchange rate. Higher U.S. Treasury yields enhance the attractiveness of dollar-denominated assets, leading to upward pressure on the dollar, while rising oil prices increase the demand for dollars needed for crude oil imports, contributing to a weaker won. The expectation that the Federal Reserve will raise interest rates within the year also supports the outlook for bond yields and a stronger dollar.
According to the CME FedWatch, the interest rate futures market reflects a 64.2% probability that the Federal Reserve will raise the benchmark interest rate at its upcoming Federal Open Market Committee (FOMC) meeting in October. At the FOMC meeting held this month, the Federal Reserve indicated a median policy rate of 4.13% for the end of the year, leaving the door open for further hikes.
The correlation with the Japanese yen is another variable affecting the exchange rate. Although the Bank of Japan raised its policy rate from 1.00% to 1.25% on September 18, the yen has weakened. Similarly, the won has also shown weakness, with the won-dollar exchange rate rising for seven consecutive trading days since September 9, increasing by 47.2 won during this period.
However, strong exports and a current account surplus are expected to limit the depreciation of the won. Lee Jeong-hoon, a researcher at Daishin Securities, noted, "Since the Federal Reserve's current rate hike is not expected to be a one-time event, the dollar is likely to experience upward pressure for the time being. However, if the rate hikes conclude after two or three increases, both the magnitude and duration of the dollar's strength will be limited."
He added, "While there may be upward pressure in the short term until early next year as the Federal Reserve continues its rate hikes, the likelihood of surpassing the 1,400 won level remains low. The current account surplus suggests that the won may strengthen through next year."
* This article has been translated by AI.
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