Rising US Treasury Yields Push 'Loan Interest Rates' Higher... Stabilization Expected Next Month

Concerns Over US Tightening Drive Treasury Yields Higher
Domestic Loan Rates Face Rising Pressure with Delay
Focus on Powell's Jackson Hole Speech on 25th
Bank of Korea Expects Decline After Next Month's FOMC

As expectations grow that the U.S. Federal Reserve (Fed) will maintain high interest rates for an extended period, bond yields have recently shown a sharp upward trend. Since U.S. Treasury yields influence South Korea's government bond and bank bond yields, there is analysis suggesting that bank loan interest rates may rise further in the future.

The market is focusing on Fed Chair Jerome Powell's Jackson Hole speech on the 25th and the U.S. Federal Open Market Committee (FOMC) results next month. Depending on how hawkish (favoring monetary tightening) the Fed reveals itself to be, it is expected to significantly impact domestic government bond yields, loan interest rates, and interest burdens.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

According to the Korea Financial Investment Association on the 19th, the yields on 3-year and 5-year government bonds closed at 3.729% and 3.804%, respectively, the previous day. The 10-year and 20-year bonds ended at 3.914% and 3.832%, respectively.

Although yields fell slightly compared to the previous trading day as part of a partial correction of recent increases, they remain high considering that mid-last month, government bond yields were around 3.5% to 3.6%.

The recent sharp rise in domestic government bond yields is due to a surge in U.S. Treasury yields amid concerns over prolonged Fed tightening. Strong U.S. consumer spending and employment have increased expectations for a soft economic landing, while rising international oil prices have fueled inflation concerns.

The yield difference between U.S. and South Korean government bonds typically ranges from 15 to 20 basis points (1bp = 0.01 percentage points). The 10-year U.S. Treasury yield closed at 4.25% the previous day. Although it fell slightly from the previous trading day, it surpassed 4.3% on the 17th (local time), reaching the highest level in 16 years since November 2007.

When U.S. Treasury yields rise, they affect South Korea's government and bank bond yields with a time lag. This has raised concerns that domestic bank loan interest rates, including mortgage loans, will face upward pressure going forward.

Some suggest that the Fed may raise the benchmark interest rate, currently at 5.25% to 5.50% annually, once more within this year. If U.S. consumer spending and employment continue to perform well, the Fed will likely maintain a tight monetary policy stance for a considerable period to stabilize prices.

Bank of Korea Governor Lee Chang-yong is delivering opening remarks at the Bank of Korea loan system reform direction press briefing held on the 27th of last month at the Bank of Korea in Jung-gu, Seoul.
[Photo by Yonhap News]

The market is currently focusing on Chair Powell's Jackson Hole speech scheduled for the 25th. The key issue is whether Powell will reveal a hawkish stance or signal some changes in the tightening monetary policy during this meeting.

Although upward pressure on U.S. Treasury yields remains strong for now, the Bank of Korea expects that after next month's U.S. FOMC meeting, U.S. Treasury yields will ease, leading to some stabilization in domestic government bond yields.

A Bank of Korea official explained, "There is uncertainty as the increase in government bond yields has been larger than initially expected, but after the FOMC, expectations that the Fed's rate hike cycle will end are emerging, so yields are expected to gradually decline."

There are also forecasts that domestic government bond yields will trend downward regardless of U.S. Treasury yields.

Myungshil Kim, a researcher at Hi Investment & Securities, said, "As of recent days, the domestic bond market shows a gradual slowdown in the pace of yield increases compared to the global market," adding, "Since South Korea's rate hikes have been on hold, the potential for further government bond yield increases will inevitably be limited."

The benchmark for setting fixed mortgage loan rates is the 5-year bank bond yield, which is based on the 5-year government bond yield. If government bond yields stabilize, loan interest rates are also expected to be adjusted downward, stimulating demand for mortgage loans.

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