KOSPI Falls Amid Surge in Korean and U.S. Bond Yields... Is This Similar to the "Dot-Com Bubble"?

When U.S. Treasury Yield Surpassed 5.5% in 1999, KOSPI Fell 23%

"Things Are Different Now"... Strong Tech Earnings

Real Interest Rate, Excluding Inflation, Remains Negative

As global government bond yields surge, the KOSPI has been declining for several consecutive days, evoking memories of the past "dot-com bubble." However, analysts note that, unlike during the dot-com bubble, current real interest rate conditions and robust corporate earnings are providing solid support for the stock market's downside. As a result, there is growing consensus that the current phase is not a harbinger of a full-scale collapse but rather a process of resolving short-term overheating that has accumulated during the bull market.

On the 20th, the current status of KOSPI and others are displayed on the dealing room board at Hana Bank in Jung-gu, Seoul. Photo by Yonhap News Agency

On May 20, the KOSPI opened at 7,324.52, up 0.73% from the previous trading day, but as of 9:50 a.m., it was trading at 7,154.64, down 1.61%. During the early session, it dropped as low as 7,053.84 points. At the same time, the KOSDAQ was trading at 1,049.68, down 3.20%. The won-dollar exchange rate opened at 1,509.0 won, up 1.2 won from the previous session, and was trading at 1,511.5 won.

Yields on Korean government bonds remain at high levels. In the Seoul bond market, the yield on 20-year government bonds rose by 13.2 basis points to 4.215% on May 15, then closed at 4.262% per annum the previous day, down 0.6 basis points (1bp = 0.01 percentage point). The 10-year bond yield fell by 2.9 basis points to 4.210% per annum. The 30-year and 50-year bonds closed at 4.204% and 4.046% per annum, respectively, up 0.8 and 0.6 basis points.

Overnight, all three major New York stock indexes also declined, driven by a sharp rise in U.S. Treasury yields. On May 19 (local time), the Dow Jones Industrial Average closed at 49,363.88, down 322.24 points (0.65%) from the previous session. The S&P 500 fell 49.44 points (0.67%) to 7,353.61, while the tech-heavy Nasdaq Composite ended at 25,870.71, down 220.02 points (0.84%).

The yield on the 30-year U.S. Treasury surpassed 5.2% during trading on May 20 (local time), marking the highest level since 2007. On the same day, the 10-year U.S. Treasury yield climbed to 4.67%, its highest in over a year. The ongoing sell-off in government bonds is attributed to inflationary pressures resulting from war. With the U.S.-Iran war that began on February 28 now in its 82nd day, the burden of high prices has increased. According to the U.S. Department of Labor, the Consumer Price Index (CPI) for April rose 3.8% year-on-year and 0.6% month-on-month. This was attributed to a 5.4% increase in gasoline prices over the past month.

International oil prices fell slightly for the first time in four trading sessions but remain high, hovering around $110 per barrel. July Brent crude futures dropped 0.73% from the previous session to $111.29 per barrel, while June West Texas Intermediate (WTI) futures fell 0.82% to $107.77 per barrel. Although U.S. President Donald Trump dismissed concerns about a widening Middle East war, expectations for a swift normalization of the Strait of Hormuz have diminished due to continued tensions between the U.S. and Iran. Citigroup forecasted that Brent crude prices could rise to $120 per barrel in the short term.

The collapse of the dot-com bubble from 1995 to 2000, one of the three major bubbles in the past 120 years, was also triggered by rising interest rates. According to KB Securities, in May 1999, when the U.S. 10-year Treasury yield surpassed 5.5%, the KOSPI experienced a short-term correction, plunging 23% from its peak. After the Federal Reserve began raising its benchmark rate in June of that year, uncertainty dissipated, and the KOSPI rebounded by 14%, while the Nasdaq nearly doubled in a strong rally. The true bubble burst came only in 2000, when rate hikes were implemented consecutively.

Indeed, during the bull market in 1999, the KOSPI saw two corrections of over 20% and two of over 10% in a single year, yet continued to rise. The faster and stronger stock prices climb, the harder it is to avoid increased volatility. However, there are also warnings that if broad-based rate hikes continue, even strong corporate earnings may not be enough to prevent real markets and artificial intelligence (AI) investments from being impacted.

There is also a clear difference in real interest rate volatility compared to the dot-com bubble era. According to Yuanta Securities, past market collapses triggered by "taper tantrums" mostly occurred when both nominal and real interest rates surged. As of May, the U.S. real policy rate—calculated by subtracting headline CPI from the Fed's policy rate—remains in negative territory at -0.43%. Taking inflationary pressures into account, this means current monetary conditions are still accommodative and expansionary.

Unlike before, the present situation is also supported by strong economic indicators and corporate earnings. The U.S. second-quarter GDP growth rate is estimated at 4.0%. From a stock market perspective, profitability that can withstand cost pressures is more important than high interest rates, and major tech companies are seeing rapid improvements in earnings. Even if there is a correction to resolve short-term overheating, the low valuation burden suggests that the decline will be limited.

Kim Yonggu, a researcher at Yuanta Securities, said, "Even if we assume extreme latent uncertainty in a phase where nominal and real interest rates diverge, market shocks are likely to be limited to a KOSPI decline of around 10% from its peak. In this scenario, the KOSPI's lower bound is likely to form around 7,200 points. Rather than selling, this correction should be used as an opportunity to buy leading stocks in the market and semiconductors."

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