Soaring Government Bond Yields... 3-Year Bond at 3.548%, Highest in 10 Years and 2 Months

Yoon's 'Giant Step' Possibility
Government Bonds Simultaneously Hit New Highs

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] As the possibility of the U.S. Federal Reserve (Fed) taking a 'giant step' (raising the benchmark interest rate by 0.75 percentage points at once) has emerged, government bond yields surged sharply, hitting new yearly highs.

On the 14th in the Seoul bond market, the 3-year government bond yield rose 3.4 basis points (1bp=0.01 percentage points) from the previous trading day to 3.548% per annum. This marked a new yearly high, the highest level in 10 years and 2 months since March 30, 2012, when it recorded 3.55%.

The 10-year bond yield increased by 3.7bp to 3.691% per annum, reaching its highest level since January 3, 2014 (3.700%). The 5-year bond rose 2.4bp to 3.703% per annum, the highest since April 5, 2012 (3.71%).

The 2-year bond closed at 3.425% per annum, up 12.2bp. The 2-year bond, first issued on March 10 last year, has surpassed 3% for the first time on the 10th and has hit new yearly highs for three consecutive trading days.

The 20-year and 30-year bonds rose by 4.2bp each, closing at 3.588% and 3.429% per annum, respectively. These are the highest levels since July 2, 2013 (3.59%) and June 11, 2013 (3.43%), respectively. The 50-year bond rose 4.1bp to 3.400% per annum, marking a record high since its first issuance on October 11, 2016.

The possibility that the Fed might implement a giant step (a 0.75 percentage point rate hike at once) at this month's Federal Open Market Committee (FOMC) regular meeting, triggered by U.S. inflation shocks, has stimulated bond yields.

According to the FedWatch tool of the Chicago Mercantile Exchange (CME) Group on the 13th (local time), the probability of the Fed raising the benchmark interest rate by 0.75 percentage points at this meeting surged to 93.0%, four times higher than the previous trading day (23.2%).

On the 14th, as the KOSPI fell more than 1% in early trading, breaking below the 2500 level, dealers were working in the Hana Bank dealing room in Euljiro, Seoul. Photo by Moon Honam munonam@

Initially, the probability of a 0.5 percentage point hike was considered high for this meeting, but the situation changed drastically within one trading day. Among major U.S. Wall Street investment banks (IBs) such as JP Morgan, the forecast that the Fed will raise the benchmark interest rate by 0.75 percentage points at this meeting is gaining traction.

This is because last month's U.S. Consumer Price Index (CPI) rose 8.6% year-on-year, marking the largest increase in over 41 years since December 1981, shattering the previous perception that inflation had peaked.

Accordingly, concerns are rising in the domestic financial market that U.S. interest rates could surpass those of Korea. Earlier, on the 26th of last month, the Bank of Korea's Monetary Policy Committee raised the benchmark interest rate by 25bp from 1.50% to 1.75% per annum, but with the U.S. rate hike pace accelerating beyond expectations, an interest rate inversion is imminent.

If the U.S. benchmark interest rate exceeds Korea's, it could lead to capital outflows, depreciation of the Korean won, and consequent inflation.

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