The rise in long-term interest rates in the United States has led to a corresponding increase in South Korea's long-term interest rates, primarily driven by global inflation shocks. Notably, during the transmission of these global shocks to domestic long-term rates, expectations regarding the Bank of Korea's future monetary policy had a greater impact than investors' risk compensation.
According to a report released on September 20 by the Bank of Korea's Economic Research Institute, the synchronization of long-term interest rates between Korea and the U.S. significantly increased following the global financial crisis in 2008 and during the global inflation shock in 2021. This phenomenon not only reflects the movement of both countries' long-term rates in the same direction but also shows a simultaneous expansion and contraction in the volatility of these rates.
The research team found that the contribution of global inflation shocks to the synchronization of long-term interest rates was the highest at 41.0%. This was followed by U.S. long-term interest rates at 22.7%, the monetary policy of the Federal Reserve at 18.3%, and the U.S. economy at 18.0%.
In particular, during the transmission of external shocks, including global inflation to Korean long-term interest rates, the 'policy expectations' pathway, which reflects expectations about future central bank policy rates, played a crucial role. In contrast, the influence of the risk compensation pathway, which adjusts the term premium of long-term interest rates, was relatively small.
Specifically, of the 0.385 contribution of global inflation shocks to the synchronization of long-term interest rates between Korea and the U.S., the policy expectations pathway accounted for 0.361, while the risk compensation pathway contributed only 0.023. This indicates that when global inflation shocks are transmitted to Korean rates, market expectations regarding future domestic monetary policy have a significantly greater impact than changes in investors' risk compensation.
This trend was also confirmed in the context of the Federal Reserve's unconventional monetary policies, such as quantitative easing (QE). An analysis of interest rate movements five days before and after major policy announcements revealed that the U.S. 10-year Treasury yield fell by an average of 34.2 basis points (1 basis point = 0.01 percentage points), while the Korean 10-year yield dropped by 17.9 basis points. Of the decline in Korean rates, the policy expectations pathway accounted for 10.9 basis points, while the risk compensation pathway contributed 7.0 basis points.
The Bank of Korea noted that the synchronization of long-term interest rates between Korea and the U.S. may be an inevitable phenomenon due to changes in global conditions. However, it suggested that effective communication with the market could help manage these expectations and potentially mitigate the synchronization effect.
* This article has been translated by AI.
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