Soaring Oil Prices Drive Government Bond Yields Higher

As international oil prices surpass $100 per barrel, inflation concerns are growing, and on March 9, government bond yields are surging in the Seoul bond market.

As of 10:00 a.m. on this day, the yield on three-year government bonds is recording a sharp rise of 17 basis points (1bp = 0.01 percentage point) from the previous session, reaching 3.397%. Earlier in the session, it briefly exceeded the 3.4% range. At the same time, the yield on 10-year government bonds is up 11 basis points to 3.730%.

This is interpreted as a result of heightened inflation expectations triggered by the steep rise in international oil prices, amid growing concerns over the prolonged situation following more than a week of U.S. and Israeli airstrikes on Iran. Fears that rising energy prices could lead to broader price pressures have prompted bond investors to price in the possibility of further rate increases. An increase in bond yields means a decline in bond prices.

On the New York Mercantile Exchange, April delivery West Texas Intermediate (WTI) crude oil futures are trading at around $108 per barrel as of 10:30 a.m. Korea time, up about 18% from the previous session. This is the first time since July 2022 that the WTI price has exceeded $100 per barrel.

The high exchange rate, approaching the 1,500 won level per U.S. dollar, is also acting as a burden on the bond market. A rising dollar-won exchange rate (weaker won) can intensify inflationary pressures by raising import prices and also increases the risk of foreign capital outflows. On this day, the won-dollar exchange rate in the Seoul foreign exchange market opened at 1,493.0 won per dollar, up 16.6 won from the previous session, and has been fluctuating within the 1,490 won range. This is the highest level since March 2009, during the financial crisis, and in the securities industry, there is talk that the 1,500 won threshold could be breached this week.

Park Sanghyun, a researcher at iM Securities, wrote in a report on this day, "This week will be a critical turning point in determining whether the Iran situation will be prolonged," adding, "If oil prices surge further, there is a strong possibility the dollar-won exchange rate will break through the 1,500 won level." Yoon Yeosam, a researcher at Meritz Securities, said, "It will be difficult for bonds to serve as a safe haven asset until the uncertainty is resolved," and diagnosed, "If the risk of war is resolved within a month and oil prices return to pre-war levels, market interest rates are likely to revert to late-February levels."

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