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 the highest levels in decades, pressure is being felt in the domestic bond market as well. The global bond sell-off, the prospect of an additional Bank of Korea base rate hike, and concerns about the burden of increased government bond supply due to expansionary fiscal policy have combined to push the yield on three-year government bonds in Korea close to the 4% mark. There is growing concern that the funding burden for companies facing massive refinancing in September and October will increase significantly.

Three-Year Government Bond Yield Surpasses 3.9%...Up 99.5bp from the Start of the Year

According to the Korea Financial Investment Association on September 3, the yield on the three-year government bond in the Seoul bond market closed at 3.930% per annum the previous day, up 5.2bp (1bp=0.01 percentage point) from the previous trading day. After once again breaking through the psychologically significant resistance level of 3.9%, the gap with the highest yield of the year (3.959% on July 24) narrowed to 2.9bp. Compared to the beginning of the year, this is a steep rise of 99.5bp.

On the same day, the yield on the 10-year bond also climbed 4.7bp to 4.417%, hitting its highest level since July 24. Five- and 30-year bond yields rose by 6.1bp to 4.167% and by 3.0bp to 4.657%, respectively.

This trend is analyzed as the result of the widespread rise in global interest rates—including those in the US and Japan—spilling over into Korea, combined with domestic factors such as the prospect of a Bank of Korea rate hike, the burden of increased government bond supply due to expansionary fiscal policy, and worsening supply/demand conditions for ultra-long-term bonds. Foreign investors have also been net sellers of three-year government bond futures for five consecutive trading days, increasing upward pressure on yields.

Park Junwoo, a researcher at Hana Securities, commented, "Solid growth trends and inflation pressure persistently exceeding targets are at the core of rising interest rates in major economies." Kim Jiman, a researcher at Samsung Securities, highlighted the upward trend in US and Japanese government bond yields, noting, "There is little reason to expect the direction of Korean interest rates to differ dramatically."

Overnight, the global benchmark US 10-year Treasury yield broke through 4.81% during trading, marking the highest level since November 2023. Despite private sector employment data coming in below market expectations, the factors that have recently pushed up government bond yields—such as inflation concerns fueled by the Middle East, and the possibility of further tightening by the Federal Reserve—remain in play. Japanese 10-year bond yields also topped the 3% mark.This is the highest level in nearly 30 years since 1996.

In Korea, after two consecutive base rate hikes, it is considered a near certainty that the Bank of Korea will carry out an additional increase within the year. Researcher Park predicted, "The terminal base rate will reach 3.50% through additional hikes in November this year and February next year," adding, "Three- and ten-year government bond yields will need to exceed 4.0% and 4.4%, respectively, to be considered at a 'shoulder' level. We expect highs of 4.3% and 4.7% during the fourth quarter."

Additionally, the recent release of the 2027 budget proposal has confirmed continued expansionary fiscal policy and consequently the burden of increased government bond supply, which is heightening caution in the bond market. While net new issuance will decrease by 1.31 trillion won, total issuance will remain at over 220 trillion won, meaning that the monthly auction scale will be largely unchanged from this year. Ahn Yeha, a researcher at Kiwoom Securities, stated, "An expansionary fiscal stance driving a 12.8% increase in total expenditures is a factor that will exert upward pressure on government bond yields through its effects on economic growth and inflation," adding, "The most direct upward pressure will be seen in three-to-five-year bond yields."

Supply and demand conditions for ultra-long-term bonds are also cited as a concern. At this week’s auction for 30-year government bonds, demand turned out weaker than expected despite a reduction in the issuance size by 300 billion won. This is attributed to a combination of weaker demand from long-term investors such as insurance companies, the burden of supplying new benchmark bonds, and a lack of demand from foreign investors and asset managers.

Funding Costs Rising amid Refinancing Needs...70% of Maturities Concentrated in September and October

The rise in government bond yields is already having a direct impact on corporate funding. On the previous day, JB Financial Group postponed its planned book-building for new hybrid securities, which was initially intended to raise 100 billion won, citing market conditions. Both within and outside the market, analysts are pointing out that a rise in long-term borrowing costs and increasing refinancing needs of financial institutions and corporations are combining to worsen issuance conditions.

Particularly in September and October, a concentration of corporate bond maturities is expected to increase the refinancing burden on companies. As of mid-August, about 70% of the remaining maturities for senior, unsecured corporate bonds rated A+ or lower are concentrated in September and October, heightening the risk that companies with relatively lower credit ratings may face increased funding pressure.

So far this year, general corporations have been reducing their issuance of corporate bonds and increasing reliance on short-term funding instead. According to Hana Securities, total corporate bond issuance (excluding financial companies) amounted to 34 trillion won in the January–July period, down from 46 trillion won over the same period last year. Net repayments reached 9 trillion won, while the outstanding balance of short-term borrowings increased by 9 trillion won.

Choi Seongjong, a researcher at NH Investment & Securities, commented, "The rapid rise in interest rates has led to a decrease in the number of companies participating in book-building compared to last year," adding, "Corporate loan rates at commercial banks are now lower than corporate bond interest rates." Choi added, "With the spread between short-term money market rates and corporate bond rates widening to more than 100bp, securing funds through the short-term money market is absolutely advantageous from a cost perspective."

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