South Korean government bond yields have been on a soaring trajectory, surging by nearly 0.5 percentage points in just the past month, and are now heading towards the 5 percent range.
According to the Economic Statistics System of the Bank of Korea (BOK) on Oct. 5, the yield on 10-year government bonds, based on the previous day’s closing price, surged by 0.321 percentage points to reach 4.351 percent. This marks a record high for the year, surpassing the previous record. Compared to a month ago on Sept. 1, when it was 3.778 percent, the yield has risen sharply by 0.573 percentage points.
The 5-year government bond yield also rose significantly from 3.717 percent to 4.203 percent over the same period, while the 3-year bond yield increased by more than 0.4 percentage points from 3.689 percent to 4.107 percent, entering the 4 percent range. These yields also marked the highest levels of the year.
Compared to the current BOK benchmark interest rate of 3.50 percent, the yields on 10-year, 5-year, and 3-year government bonds differ by 0.851 percentage points, 0.703 percentage points, and 0.607 percentage points, respectively.
In the bond market as well, it is interpreted that there are expectations of future interest rate hikes in South Korea. When the benchmark interest rate rises, bond prices tend to fall, and bond yields increase as bond prices decline.
Typically, the bond market tends to anticipate and move ahead of such trends. In other words, the recent surge in bond yields and the widening gap with the benchmark interest rate suggest that the market’s prevailing outlook is that interest rates will rise in the future.
The rise in government bond yields is influenced by the surge in U.S. Treasury yields. South Korean government bonds often follow the trends of U.S. Treasury bonds, and as of the latest data on Oct. 3, the yield on the U.S. 10-year Treasury bond surged to 4.81 percent and continued to rise to 4.88 percent on Oct. 4, with the 5 percent mark within reach. This is the highest level in 16 years since August 2007. It represents a significant growth compared to just staying in the early 3 percent range as of early May. The U.S. 10-year Treasury bond serves as a benchmark for government bond yields.
The consecutive hawkish messages from the U.S. Federal Reserve (Fed) signaling a preference for monetary tightening have ignited concerns in the U.S. bond market. Contrary to market expectations for interest rate cuts, the Fed’s indication of a prolonged high-interest-rate environment has led to a decline in U.S. Treasury bond prices and an increase in yields. Additionally, the growing U.S. fiscal deficit, along with expectations of increased debt issuance to address it, has also contributed to the decline in U.S. Treasury bond yields.
With the U.S. signaling a prolonged tightening of monetary policy, the South Korean market is also anticipating a possible benchmark interest rate hike within the year. There is growing pressure on the BOK regarding the decision on whether to raise the benchmark interest rate. The BOK’s Monetary Policy Committee, which determines the benchmark interest rate adjustments, is scheduled for Oct. 19.
The historically significant gap between South Korea and the U.S. interest rates is also putting pressure on the bond market. The BOK has kept its benchmark interest rate unchanged for the fifth consecutive time, resulting in a 2.00 percentage point gap with the U.S., which has rates ranging from 5.25 percent to 5.50 percent.
The won to U.S. dollar exchange rate is already experiencing fluctuations due to the impact of the sharp rise in U.S. Treasury yields. On Oct. 4, the won-to-dollar exchange rate closed at 1,363.5 won, up 14.2 won from the previous day, reaching its highest point in 11 months. If this trend continues, it’s believed that the exchange rate may approach the 1,400 won level. Furthermore, if the benchmark interest rate in South Korea significantly diverges from that of the United States, there is a concern that the value of the won could depreciate rapidly and foreign investors could withdraw their funds from the market.