"Fed's Aggressive Tightening Increases Likelihood of Inverted Treasury Yields"

US Treasury Yields Likely to Exceed Korean Government Bonds
"Need to Monitor Korean Government Bond Trading Trends"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] An analysis has emerged suggesting that if the U.S. Federal Reserve's (Fed) high-intensity tightening policy continues, not only the benchmark interest rates of South Korea and the U.S. but also the Korea-U.S. government bond yields are likely to invert.

Baek In-seok, Senior Research Fellow at the Korea Capital Market Institute, stated in a report titled "Evaluation of the U.S. Fed's Monetary Policy and Its Impact on Domestic Interest Rates" on the 16th that "the Fed's rate hike shock has been shown to raise government bond yields mainly in the long-term segment and also affect other market interest rates."

Senior Research Fellow Baek explained, "In the short term, corporate bond yields rise, and as banks' funding costs increase, loan interest rates such as household loans are also estimated to increase."

On the same day, the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the benchmark interest rate by 0.75 percentage points. Accordingly, the U.S. benchmark interest rate sharply increased from the previous 0.75?1.00% to 1.50?1.75%. The pace of rate hikes is expected to accelerate further.

Senior Research Fellow Baek assessed, "If the Fed's tightening continues, it is highly likely that not only the Korea-U.S. policy rates but also government bond yields, especially short-term yields, will invert."

He added, "It can be confirmed that recently, the domestic government bond yields have shown a distinctly strengthened tendency to synchronize with U.S. rates. When the Fed's rate hike shock occurs, it can be expected to act as an additional upward factor on the already steeply rising domestic market interest rates."

Considering recent foreign investors' investment tendencies, Senior Research Fellow Baek judged that the interest rate differential between domestic and foreign rates would have little impact on overall capital inflows and outflows, as most government bond investors are foreign central banks.

However, he pointed out, "In a situation where downside risks to the economy are increasing, if the Fed's tightening intensifies, negative effects may be amplified, so it is necessary to pay close attention to government bond trading trends."

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