"Global Inflation Shock Strengthens Korea-U.S. Yield Synchronization... Market Communication Needed for Management"

BOK Economic Research: Analysis of Korea-U.S. Long-term Yield Synchronization

41% of Korea-U.S. Long-term Yield Co-movement Driven by Global Inflation
Inflation Shocks Lead to Interest Rate Hike Expectations in Both Countries
"Managing Policy Expectation Channels Can Partially Alleviate Synchronization"

The Bank of Korea has analyzed that 41% of the co-movement in long-term government bond yields between South Korea and the United States can be attributed to the impact of global inflation. The analysis found that inflation shocks have strengthened the synchronization of South Korean and U.S. long-term yields by raising expectations for interest rate hikes in both countries. Since global inflation transmits into higher interest rates via policy expectation channels, it has been suggested that enhancing communication with the market about policy expectations may partly mitigate this synchronization phenomenon.

Yonhap News

The Bank of Korea announced on the 20th, through its report "BOK Economic Research: Analysis of the Co-Movement of Korea-U.S. Long-term Bond Yields—Can the Synchronization Be Managed?," that it had analyzed the causes and transmission channels of the Korea-U.S. long-term bond yield co-movement. The report was jointly authored by Jaeho Yoon, Professor of Economics at Ewha Womans University, Dowan Kim, Director of the Gyeongnam Planning and Investigation Team at the Bank of Korea Gyeongnam Branch, and Hyungseok Lee, Associate Research Fellow at the Financial and Monetary Research Division of the Bank of Korea Economic Research Institute.

The research team analyzed daily movements in 10-year government bond yields for both South Korea and the United States from 2001 to July 2024—a span of over 24 years. The findings indicate that, in both the aftermath of the 2008 global financial crisis and during the shock of global inflation in 2021, not only did the direction (covariance) but also the volatility of long-term yields in South Korea and the U.S. sharply increase. Lee Hyungseok, Associate Research Fellow at the Economic Research Institute, explained, "This means that the co-movement in long-term yields between South Korea and the U.S. is evident not only in direction but also in terms of volatility."

The main factor contributing to the Korea-U.S. long-term yield co-movement was identified as the global inflation shock. When the research team broke down these factors using the Gaussian Dynamic Term Structure Model (GDTSM), they found that 41% of the synchronization phenomenon was attributable to global inflation. Global inflation was found to be mainly transmitted to Korean long-term yields via market expectations of future interest rate hikes by central banks—i.e., through the policy expectation channel. This was followed by 22.7% attributable to U.S. long-term yields, 18.3% to Federal Reserve monetary policy, and 18% to the U.S. economy.

The study also found that even when the Fed implemented unconventional monetary policies, such as quantitative easing, co-movement occurred through the policy expectation channel. In an event study of major Fed policy announcement dates, the research team noted that both short- and long-term Korean interest rates fell around key quantitative easing announcements—a phenomenon driven more by policy expectations than by risk compensation.

Associate Research Fellow Lee commented: "The fact that external common shocks such as global inflation are the primary underlying causes of the Korea-U.S. yield synchronization means that this phenomenon may be unavoidable in the context of changes to the global environment. However, during the transmission process to domestic long-term yields, expectations that domestic policy rates will synchronize also play a key role." He added, "This suggests that by appropriately managing these expectations through communication with the market, it is possible to partially reduce the degree of co-movement."

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