U.S. Treasury yields have surged to their highest levels since 2007, raising tensions in South Korea's financial markets. The rise in long-term U.S. rates has pushed domestic bond yields higher, raising concerns that a strong dollar and foreign capital outflows could further pressure the won and the stock market.
According to the Korea Financial Investment Association, the yield on three-year government bonds fell by 4.3 basis points to 4.076% on September 29. The yield on 10-year government bonds decreased by 6.3 basis points to 4.476%. The previous day, the yield on three-year government bonds had risen by 11.3 basis points to 4.119%, the highest level since November 2022. The yield on 10-year bonds also saw a rise of 14.7 basis points. The sharp increase in U.S. Treasury yields during the Chuseok holiday was reflected in the domestic market, leading to a significant rise in rates.
On September 28, the yield on 10-year U.S. Treasury bonds climbed to around 5.240%, the highest level in nearly 19 years. Factors such as geopolitical instability in the Middle East, rising international oil prices, inflation concerns, and an expanding U.S. fiscal deficit have contributed to ongoing selling pressure in the bond market. Notably, last week, the yield spread between U.S. two-year and ten-year bonds narrowed to as low as 17 basis points, raising concerns about a potential yield curve inversion.
However, as long-term rates continued to rise sharply, the yield spread between the ten-year and two-year bonds widened back to about 32 basis points on September 28. The sustained rise in long-term rates above 5% could pose immediate challenges for South Korea's financial markets.
The pressure from rising U.S. rates is already being felt in the domestic bond market, with concerns that high government bond yields could lead to increased borrowing costs for private sector financing, including bank and corporate bonds. The yield on three-year corporate bonds rated AA- by three credit rating agencies rose from 4.659% on September 23 to 4.776% on September 28, an increase of 11.7 basis points.
The government is considering measures to address the surge in government bond yields. Deputy Prime Minister and Minister of Economy and Finance Lee Hyeong-il stated at a cabinet meeting that, "If the rise in rates is excessive, we will immediately implement necessary market stabilization measures, such as emergency buybacks." A buyback involves the government purchasing government bonds from the market before maturity. The Deputy Prime Minister noted that rising oil prices, inflation concerns, global interest rate increases, and domestic rate hikes are contributing to the upward trend in domestic bond yields.
In the foreign exchange market, there is concern about whether the won-dollar exchange rate will rise back to the 1,400 won level. If the strong dollar continues due to rising U.S. Treasury yields, it could exert downward pressure on the won. Additionally, geopolitical instability in the Middle East may increase the preference for safe-haven assets, potentially dampening investment sentiment toward the won and domestic equities. The movement of foreign investors' capital in stocks and bonds amid simultaneous increases in U.S. and domestic rates is also a key variable.
In the bond market, while rising domestic rates may attract new foreign investment, heightened global risk aversion could limit the inflow of funds. In the stock market, high interest rates could increase companies' discount rates and financing costs, putting pressure on stock prices.
The domestic stock market has already been affected by rising U.S. rates. The KOSPI fell by about 3% over two trading days on September 28 and 29. Samsung Electronics and SK Hynix both dropped nearly 5%. The negative external factors, including rising U.S. Treasury yields and geopolitical tensions in the Middle East, were reflected during the holiday period. Concerns over large-scale fundraising by U.S. AI companies are also dampening investor sentiment.
Looking ahead, the direction of South Korea's financial markets will depend on how long U.S. long-term rates remain elevated and the flow of foreign capital. Market attention is currently focused on the September employment report, which will help gauge the potential for further increases in U.S. long-term rates. Kim Myung-sil, a researcher at iM Securities, stated, "This September employment report is a key variable that will determine the next direction of interest rates," adding that if employment remains strong, upward pressure could increase beyond 5.2%.
After the employment data, the final level of the Federal Reserve's interest rate and the duration of high rates will be critical. Park Jun-woo, a researcher at Hana Securities, noted, "In the early stages of the tightening cycle, upward pressure on rates persists, and if volatility increases, it becomes difficult to pinpoint the upper limit of rates. If the period of holding rates steady after an increase is prolonged or if the reduction is minimal, rates could rise further."
* This article has been translated by AI.
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