Long-term government bond yields in major economies have jumped to their highest levels in decades, driven by rising international oil prices stemming from tensions in the Middle East and by mounting concerns over fiscal health. The United States expanded its buyback program to stabilize long-term Treasury yields, but bond prices have resumed falling — pushing yields higher — as expectations grew for a Federal Reserve rate increase following the Jackson Hole meeting. Forecasts that the Bank of Japan and the European Central Bank will also raise rates are adding to upward pressure on yields in major economies. Increased corporate bond issuance by major technology companies to fund artificial intelligence investment is also cited as a factor lifting government bond yields.
Korean treasury bond yields have risen across the board as well, reflecting the global increase in rates and the government's record-sized budget. According to the Korea Financial Investment Association, the yield on three-year Korean treasury bonds rose 0.052 percentage points from the previous session to 3.930% on the 2nd, approaching this year's high of 3.959%. The 10-year yield climbed 0.047 percentage points to 4.418%.
The problem lies in external effects. Market rates are shaped by both domestic and overseas factors. Government bond yields in major economies continue to climb even as the Bank of Korea has raised its policy rate twice in a row. Yields are surging in succession in the United States, Britain, Japan, France and Germany, leaving Korea no safe haven from rising market rates. It works much like a shop selling similar goods — government bonds — that has to lower its price when the store next door cuts its own. Frances Cheung, head of foreign exchange and rates strategy at OCBC Bank, said that rising inflation expectations are the bigger factor in Europe and Britain, while in the United States the increase is being driven by still-high real interest rates.
What matters is that when treasury bond yields jump on domestic or overseas factors, financial debentures and corporate bond yields follow. That translates into a burden for households and companies. The upward move in rates has accelerated since President Lee Jae-myung shared an article on the 30th of last month citing Morgan Stanley's forecast of a 3.5% policy rate in the first quarter of next year, effectively signaling tolerance for further tightening by the Bank of Korea. If the central bank's policy rate rises to 3.5%, monetary tightening would be as forceful as in 2022 through 2024.
Market rates move ahead of the curve when expectations for a policy rate increase build. Five-year fixed-rate mortgage rates at the five largest commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at 4.72% to 7.12% as of the same day, up 0.79 to 0.89 percentage points from 3.93% to 6.23% at the end of December last year. The policy rate has risen only 0.5 percentage points since July, meaning mortgage rates have climbed faster and by a wider margin.
Household credit, which combines household loans and purchase credit, reached 2,019.8 trillion won at the end of June this year, surpassing 2,000 trillion won for the first time, according to the Bank of Korea. Outstanding loans to self-employed business owners stood at 1,095.5 trillion won at the end of March, more than doubling in a decade from 399.8 trillion won at the end of March 2015. Vulnerable borrowers — those with low income, low credit scores or multiple debts — account for 12.8% of all self-employed borrowers.
If market rates keep rising under these conditions, interest costs for households and self-employed business owners are bound to increase sharply. A 0.25 percentage point rise in lending rates adds 1.8 trillion won to the total interest burden on the self-employed. Interest paid by an individual self-employed borrower rises by 2.24 million won. Lee has taken aim at property speculators, but the structure of rising rates means all households and self-employed business owners must share the burden.
Some analysts say market rates could keep climbing for some time on fiscal expansion alone, even without a rate increase by the Bank of Korea. The government's budget for next year calls for total spending of 820.9 trillion won, up 12.8%, or 93 trillion won, from this year's main budget and the largest on record. Net issuance of treasury bonds next year is set at 96.3 trillion won, down 12% from this year but still above the annual average of 81.7 trillion won for 2018 through 2026. Yeom Myung-bae, professor emeritus of economics at Chungnam National University, said rising long-term bond yields on the back of growing national debt is a global phenomenon, but that the United States, Japan and Europe issue reserve currencies and are therefore in a different position from Korea. Continuing to increase national debt could push domestic prices and interest rates up faster than in other countries, the professor said.
