US and Japan Bond Yields Soar, Three-Year Treasury Nears 4%... Corporate Funding Costs Under Strain

As long-term government bond yields in the United States and Japan have soared to their highest levels in decades, the domestic bond market in Korea is also under pressure. The global bond sell-off is being compounded by expectations for further rate hikes by the Bank of Korea and concerns over the supply burden of government bonds due to expansionary fiscal policy. As a result, the yield on three-year Korean Treasury bonds has come very close to the 4% mark. There are growing concerns that corporate funding burdens will become even heavier, especially for companies facing large-scale refinancing in September and October.

Three-year Treasury Yield Breaks 3.9%...Up 99.5bp from Early Year

According to the Korea Financial Investment Association on September 3, the yield on three-year Korean Treasury bonds closed at 3.930% the previous day in the Seoul bond market, up 5.2 basis points (1bp=0.01 percentage points) from the previous trading day. The yield once again broke through the psychologically important 3.9% threshold, narrowing the gap with the year’s highest point—3.959% on July 24—to just 2.9bp. This marks a sharp increase of 99.5bp compared to the beginning of the year.

On the same day, the 10-year yield also rose 4.7bp to reach 4.417%, its highest since July 24. The yields on five-year and 30-year Treasuries were 4.167% and 4.657%, up 6.1bp and 3.0bp, respectively.

This is attributed to the omnidirectional rise in global yields led by the US and Japan now spreading into Korea, while domestic factors—such as the Bank of Korea’s base rate hikes, the government bond supply burden from expansionary fiscal policy, and deteriorating demand for ultra-long bonds—are amplifying upward pressure on yields. Foreign investors further intensified upward yield pressure by net-selling three-year Treasury futures for five consecutive sessions.

Junwoo Park, a researcher at Hana Securities, explained, “Strong economic growth and persistent inflation pressures above targets are at the core of rising major-country rates.” Jiman Kim, a researcher at Samsung Securities, also remarked on the upward trend in US and Japanese government bond yields, saying, “There is little room for Korea’s rates to move in a different direction.”

Overnight, the yield on the US 10-year Treasury, the global benchmark, broke through the 4.81% level during trading, setting a new high since November 2023. This upward move in Treasury yields has persisted despite private-sector employment figures falling short of market expectations, driven instead by continued concerns over inflation stemming from the Middle East and the possibility of additional tightening by the Federal Reserve. Japan’s 10-year government bond yield also climbed above 3%. This is the highest level seen in about 30 years—since 1996.

In Korea’s case, the Bank of Korea has already carried out two consecutive base rate hikes, and another rate increase by the end of the year is considered certain. Researcher Park analyzed, “We expect the final benchmark rate to reach 3.50% through an additional hike in November this year and another in February next year,” adding, “Yields on 3-year and 10-year Treasuries would need to exceed 4.0% and 4.4%, respectively, to be considered in the ‘shoulder’ range. We expect peaks of 4.3% and 4.7% for these tenors in the fourth quarter.”

On top of this, expansionary fiscal policy—confirmed through the recently announced 2027 budget plan—and the corresponding government bond supply burden are raising caution in the bond market. Although new net issuance will decrease by 1.31 trillion won, the total issuance will remain in the 220 trillion-won range, meaning that monthly auction volumes are not expected to change significantly from this year’s levels. Yeha Ahn, a researcher at Kiwoom Securities, said, “The expansionary fiscal stance, with a 12.8% annual increase in total expenditure, will raise government bond yields through its impact on growth and inflation,” adding, “This will put the most direct upward pressure on 3-year to 5-year bond yields.”

The supply-demand environment for ultra-long bonds is also cited as a concern. In this week’s auction of 30-year Korean Treasury bonds, demand was weaker than expected even though the offered amount was reduced by 300 billion won. This is attributed to reduced demand from long-term investors such as insurance companies, as well as the overlap of supply concerns for new benchmark issues and a demand vacuum among foreign and investment trust investors.

Funding Costs Rise Along With Refinancing Demand...70% of Maturities Clustered in September-October

The surge in government bond yields is already having a direct impact on corporate funding. The previous day, JB Financial Group postponed its bookbuilding for new hybrid securities—which had originally been planned at 100 billion won—taking stock of the current market environment. Analysts inside and outside the market point out that as rising rates make long-term borrowing costlier, conditions for bond issuance are worsening, particularly as refinancing needs among financial firms and corporates intensify.

This dynamic is especially acute in September and October, when most corporate bonds reach maturity—about 70% of remaining maturities for unsecured, senior A+ or lower-rated corporate bonds as of mid-August are concentrated over these two months. This raises the prospect that funding pressures will intensify, especially for companies with relatively lower credit ratings.

Since the beginning of this year, general corporations have reduced bond issuance while increasing short-term funding activity. According to Hana Securities, regular companies (excluding financial institutions) issued 3.4 trillion won in bonds from January through July, a decrease from 4.6 trillion won in the same period last year. Net redemptions reached 900 billion won, and the balance of short-term funding increased by 900 billion won.

Sungjong Choi, a researcher at NH Investment & Securities, said, “The sharp rise in rates has reduced the number of companies participating in bookbuilding compared to last year,” adding, “The interest rate on corporate loans from commercial banks is now lower than the rate on corporate bonds.” He continued, “The gap between short-term funding rates and corporate bond rates has widened to over 100bp, making it absolutely more cost-effective for companies to secure funds in the short-term money market.”

This content was produced with the assistance of AI translation services.