"Brace for a 'Bond Winter': Soaring U.S. Treasury Yields Shake Up Korean Government Bonds"

The yield on U.S. Treasury bonds, which has surged to its highest level in decades, continues to rise. This ongoing upward trend is a result of increasing international oil prices due to heightened tensions between the U.S. and Iran, which has in turn spread renewed inflation concerns. The domestic bond market in Korea has also been affected, as yields on Korean Treasury Bonds are rising in tandem. Both within and outside the market, some are cautioning that—given the growing refinancing burden on bonds issued during the low-rate era—it is time to prepare for what some are calling a “bond winter.”

On the 28th (local time) in the New York bond market, the yield on the U.S. 10-year Treasury note, a global benchmark, reached 5.241%, the highest level since June 12, 2007. During intraday trading, it reached as high as 5.272%. The yield on the 30-year note also broke above 5.5%, hitting its highest point since 2004.

This has been attributed to rising oil prices and increased inflation concerns after the U.S. rejected a seven-day plan from Iran that included a proposal to reopen the Strait of Hormuz. On this day, November Brent crude futures closed at $105.28 per barrel, up 0.92% from the previous session. Alison Heumann, a fixed-income market expert at the Freeman School of Business at Tulane University, commented that “Geopolitical instability is driving up international oil prices, making investors more cautious.”

In addition, the rising probability of further rate hikes by the U.S. Federal Reserve (Fed) is also putting upward pressure on U.S. Treasury yields. According to the CME FedWatch tool, the current interest rate futures market is pricing in a 70.3% chance that the Fed will raise the policy rate at the Federal Open Market Committee (FOMC) meeting in October.

The recent surge in U.S. Treasury yields has had a direct impact on the Seoul bond market as well. On the 28th, the yield on Korea’s 3-year Treasury bond ended at 4.119%, up 11.3 basis points (1bp=0.01 percentage point) from the previous trading day—the highest since November 8, 2022 (4.156%). The 10-year bond yield also rose 14.7bp to 4.539%. This reflects the continued impact of sharply rising U.S. long-term yields during the Chuseok holiday period. Hyunsu Lee, a researcher at Yuanta Securities, explained, “The weak trend in Korean Treasury bonds was exacerbated as both oil prices and U.S. rates climbed further in the Asian session, combined with foreign investors selling Korean Treasury bond futures. The 10-year Korean bond yield is now at its highest since March 2011.”

The rise in Korean Treasury bond yields inevitably increases corporate funding costs. As of the same afternoon, the yield on three-year AA- rated corporate bonds was 4.788%, the highest of the year. This is a jump of more than 130bp from the beginning of the year (3.462%). The refinancing burden is particularly high in September and October, when a large volume of corporate bonds matures. According to Koscom, the amount of maturing unsecured corporate bonds in September and October is KRW 9.5831 trillion and KRW 7.7839 trillion, respectively.

Warnings are mounting that companies must prepare for a prolonged period of high interest rates. Mohamed El-Erian, Chief Economic Advisor at Allianz, predicted in an interview with CNBC that even if the Iran conflict ends and oil prices fall, the U.S. 10-year Treasury yield is likely to remain elevated around 5%. There are even predictions that the 30-year U.S. Treasury yield will exceed 6% within the year. According to a Bloomberg ‘Market Pulse’ expert survey, 53% of respondents expect the 30-year Treasury yield to surpass 6% before the end of the year. Michael Ball, Macro Strategist at Bloomberg Markets Live, said, “There is growing sentiment in the market that the Fed’s September rate hike could mark the start of a prolonged tightening cycle. On top of this, higher oil prices, concerns about the U.S. fiscal deficit, and an overall increase in global bond supply are all adding upward pressure across the yield curve.”

Yeosam Yoon, a researcher at Meritz Securities, also issued a warning in a report titled “Bond Winter, Preparing for Prolonged High Interest Rates,” saying, “The global bond market has lost its self-correcting mechanism.” Yoon noted that even though favorable exports and stable exchange rates were observed in the domestic bond market through September, concerns about import price-driven inflation are growing, making the situation far from reassuring. He added, “Until the burden from prolonged high interest rates is fully realized, bond investment should be limited to carry trades and caution should be exercised with trading.”

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