iM: "Why Are Domestic Government Bond Yields and the Exchange Rate Surging Together?... Stability Expected"

The simultaneous sharp rise in domestic government bond yields and the exchange rate has been attributed to increased uncertainty surrounding the Bank of Korea's monetary policy, the weakening of the Japanese yen, and external factors such as a short-term funding squeeze in the United States. However, there are expectations that this surge will gradually subside.

Park Sanghyun, a researcher at iM Securities, stated in a report titled "Why Are Domestic Government Bond Yields and the Exchange Rate Surging Together?" released on November 13, 2025, "An unusual phenomenon is occurring in the domestic financial market. While government bond yields and the exchange rate are surging, stock prices are also showing strength." He explained, "This is due to a temporary shift in capital flows caused by policy uncertainty, rather than a deterioration in domestic or overseas economic fundamentals or credit risk."

First, Park pointed out, "The simultaneous sharp rise in domestic government bond yields and the exchange rate (weakening of the Korean won) stems from concerns over a shift in domestic monetary policy." He assessed, "Fears that the domestic interest rate cut cycle may be coming to an end have driven up government bond yields, which in turn are putting upward pressure on the exchange rate." He continued, "Governor Rhee Changyong of the Bank of Korea has officially hinted at the possibility of a shift away from the rate-cutting stance, leading to even more pronounced volatility in government bond yields. The weakening of expectations for further rate cuts has prompted foreign investors to sell government bond futures, which is exerting upward pressure on the dollar-won exchange rate."

However, Park also analyzed that it is difficult to explain the rise in the dollar-won exchange rate solely by the surge in government bond yields. He identified three major external factors contributing to the rise in the exchange rate: the weakening of the Japanese yen, uncertainty over the U.S. Federal Reserve's interest rate policy, and a short-term funding squeeze in the U.S. money market.

In particular, he said, "Above all, the most important reason for the continued strength of the dollar is the ongoing short-term funding squeeze in the United States." He pointed out, "While the U.S. federal government shutdown is expected to be resolved within this week, the short-term liquidity crunch-namely, the shortage of dollar liquidity-has not yet been fully alleviated." The fact that demand for the Federal Reserve's Standing Repo Facility, a tool for supplying short-term liquidity, is increasing again was also cited as evidence that the funding squeeze is persisting.

Nevertheless, the simultaneous sharp rise in government bond yields and the exchange rate is expected to gradually subside rather than spread further. Park stated, "Although concerns are high that the Bank of Korea's rate cut cycle may be ending, the door to further rate cuts has not been completely closed." He predicted that the Bank of Korea would raise its growth outlook for next year at this month's Monetary Policy Committee meeting, but that the forecast would still fall short of the potential growth rate. He added, "While the domestic economy, led by the semiconductor sector, is showing stronger signs of recovery, momentum for a rebound in domestic demand, such as construction and consumption, remains weak. If apartment prices in Seoul stabilize, there is still ample room for the Bank of Korea to implement additional rate cuts."

Park also noted, "Easing of uncertainty over the U.S. Federal Reserve's interest rate policy will also put additional pressure on the Bank of Korea to cut rates." He argued, "Further rate cuts are inevitable to mitigate the slowdown in the labor market and ease the funding squeeze. In particular, the likelihood of implementing a 'mini QE' (quantitative easing) is increasing." He interpreted recent comments by John Williams, President of the Federal Reserve Bank of New York, that the time is approaching to resume bond purchases to maintain control over short-term rates, as a signal that another liquidity-boosting policy could be pursued. He added, "With the resumption of federal government operations and the Federal Reserve's continued policy of controlling interest rates, the easing of the short-term funding squeeze will not only stabilize government bond yields but also put downward pressure on the dollar."

Finally, the decline in oil prices is also expected to contribute to the stabilization of global government bond yields, as well as domestic government bond yields and the exchange rate. Park explained, "Due to expectations of oversupply in the global oil market next year, oil prices have plummeted to 58 dollars per barrel. The stabilization of oil prices will help ease inflationary pressures, which will have a positive impact on the stability of global government bond yields." He added, "For the domestic economy, which is highly sensitive to oil prices, stable oil prices will be favorable for the trade balance and terms of trade. Most importantly, it will serve as a factor improving supply and demand in the foreign exchange market, where concerns over supply shortages are growing."

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