Long-term government bond yields in the United States, Britain, France and Japan have surged to their highest levels in decades. Rising oil prices from the prolonged war in Iran, worsening fiscal deficits and demand for artificial intelligence investment funds are combining to push yields higher. Selling by investors seeking to limit losses is fueling the climb. Britain's 30-year yield touched 6.02% intraday on the 1st, exceeding 6% for the first time since 1998. It is the first time a Group of Seven nation's long-term yield has topped 6% since Italy did so during the 2012 eurozone fiscal crisis. France's 10-year yield hit 4.96%, its highest since 2002, and Japan's 10-year yield reached 3.11%, a 30-year high. The U.S. 10-year yield, the global benchmark, also hit 5.34% intraday, its highest in 24 years.
The problem is that yields could rise further. Some in the market expect the U.S. Federal Reserve, which raised its policy rate last month, to deliver three to four more increases. Rising yields in major economies will inevitably affect Korean government bond yields as well. Higher long-term rates come back to the government as an enormous interest bill. According to the Institute of International Finance, advanced economies paid $3.3 trillion in interest on government debt over the past year. Interest on treasury bonds in Korea's budget proposal for next year comes to 35 trillion won, up 19.9% from this year's main budget.
If high rates persist, the interest burden grows when the government refinances existing bonds or issues new ones to cover fiscal deficits. It was appropriate for Lee Hyoung-il, deputy prime minister and minister of finance and economy, to say at a market monitoring meeting on the 2nd that the government would reduce bond issuance and buy back debt early if needed. The government should go further than the 5 trillion won cut in October issuance funded by excess tax revenue. Reducing issuance alone will not ease the burden of repaying debt that has already piled up. If the increased tax revenue is poured into higher spending, the interest burden will only grow. The government must shrink the fiscal deficit to prepare for the interest cost on refinanced debt. Fiscal stabilization is also one of the purposes of the government's planned future response fund. The government should weigh the feasibility and priority of projects and put the brakes on fiscal expansion. Increasing debt repayment to cut interest costs, and reducing the fiscal deficit to ease pressure to issue more bonds, is a response to the future that matters as much as investment.
