[Weekly Review] Treasury Bond Yield Hits 2% Amid Disappointment Over 'Powell's Remarks'... Per Capita Income Declines for 2 Consecutive Years

Consumer Price Inflation Rate at 1.1%... Largest Increase in a Year, Burden on Low-Income Prices Intensifies

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] When Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), recently refrained from offering incentives to curb the rising trend in government bond yields caused by inflation and economic recovery concerns, government bond yields rose simultaneously both in the U.S. and domestically. As bond yields surged, prices of risk assets such as the stock market and Bitcoin fell across the board.

Due to the shock of COVID-19 last year, South Korea's per capita Gross National Income (GNI) declined for the second consecutive year. This was due to the combined effects of the COVID-19 impact and the rise in the won-dollar exchange rate. The two-year consecutive decrease in per capita GNI is the first in over a decade since the financial crisis (2008?2009). The preliminary figure for real Gross Domestic Product (GDP) growth rate in the fourth quarter of last year was 1.2%, revised upward from the initial estimate of 1.1% announced in January. However, the annual real GDP growth rate remained at -1.0%, unchanged from the preliminary figure. Consumer prices rose by 1.1% last month, marking the largest increase in a year since the spread of COVID-19. Although inflation is expected to continue, Statistics Korea assessed that the ongoing rapid price increases do not constitute a worrisome inflationary situation.

Inflation-driven rise in government bond yields... 10-year Treasury bonds surpass 2% intraday

On the 5th, in the Seoul bond market, the yield on 10-year Treasury bonds closed at 1.992% per annum, up 2.0 basis points (1bp = 0.01 percentage points) from the previous trading day. The final bid yield as of 11:30 a.m. was 2.009% per annum, surpassing the 2% mark for the first time in two years since March 2019. The yield on 3-year Treasury bonds closed at 1.066% per annum, up 3.6 basis points, the highest level since April 3 last year (1.066%).

Disappointment over Chairman Powell's remarks caused Treasury bond yields to soar. At an online event hosted by The Wall Street Journal (WSJ), Powell did not explicitly express a willingness to respond to the recent rise in market interest rates, disappointing the market. As the market felt let down, the yield on the 10-year U.S. Treasury bond surged to the 1.5% range.

Despite the ongoing COVID-19 shock, central banks around the world, including the Bank of Korea, are maintaining near-zero benchmark interest rates to offer low loan rates to households and businesses. However, the unexpected rise in long-term interest rates is raising concerns. Contrary to the central banks' intentions, loan rates are increasing, and the rise in government bond yields signals the end of the prolonged 'low-interest-rate party.' This burdens not only companies and households but also governments that increased debt due to the COVID-19 crisis. Consequently, the stock market fell below the 3,000-point mark, and the won-dollar exchange rate surged intraday to the 1,130 won level.

The issuance of deficit government bonds amounting to about 10 trillion won for additional budget spending on disaster relief payments is also cited as one of the factors driving up bond yields. Although the Bank of Korea announced plans to purchase government bonds worth 5 to 7 trillion won in the first half of this year, its impact on the market is limited.

Per capita national income $31,755, declines for second consecutive year

Despite the shock of COVID-19, South Korea's per capita Gross National Income (GNI) remained above the $31,000 mark last year. According to the '2020 Fourth Quarter and Annual National Income (Preliminary)' report released by the Bank of Korea on the 4th, last year's per capita GNI was $31,755, down 1.1% from the previous year. In 2019, per capita GNI recorded $32,115, a 4.3% decrease from the previous year, reflecting another decline in income due to the economic contraction caused by the COVID-19 crisis.

Per capita GNI is an indicator used to gauge the average living standard of a country's citizens, calculated by dividing the total income earned by nationals domestically and abroad by the population. It is calculated using exchange rates for international comparison. South Korea first entered the $30,000 era in 2017 ($31,734), increased to $33,564 in 2018, and maintained the $30,000 range for four consecutive years.

The only other times per capita GNI declined for two consecutive years were during the Asian financial crisis in 1997?1998 and the global financial crisis in 2008?2009, both heavily influenced by fiscal and external shocks. The GNI decreases in 2019 and 2020 were largely due to the COVID-19 pandemic and the depreciation of the Korean won. The won-dollar exchange rate rose by an average of 1.2% last year and by 5.9% in 2019.

There are forecasts that South Korea's per capita GNI will surpass that of Italy, a G7 country, due to relatively successful COVID-19 containment without lockdowns. However, the Bank of Korea remains cautious. Italy's per capita GNI last year was approximately 27,840 euros. Shin Seungcheol, head of the Bank of Korea's National Accounts Department, said, "Comparisons between countries must apply the same exchange rates," adding, "We need to look at international organizations' announcements to know for sure."

Last year's real GDP growth rate was -1.0%, unchanged from the preliminary figure announced in January. This marks the first negative growth in 22 years since 1998 (-5.1%). Nominal GDP, which reflects price changes, was 1,924.4529 trillion won, up 0.3% from the previous year. This nominal GDP growth rate is lower than the 1.1% recorded in 2019 and is the lowest since 1998 (-0.9%).

Amid the economic downturn caused by COVID-19, which has severely impacted the livelihood economy, the continuous rise in prices has also put daily food costs on high alert. According to Statistics Korea on the 25th, the consumer price index in January increased slightly by 0.6% compared to the same period last year, but agricultural, livestock, and marine products surged by 10%. The photo shows citizens shopping at a large supermarket in Seoul on the same day. Photo by Kim Hyunmin kimhyun81@

Consumer price inflation rate 1.1%... largest increase in a year, burden on low-income households intensifies

Last month, consumer prices rose by 1.1%, marking the largest increase in a year since the spread of COVID-19. The surge in prices of agricultural, livestock, and fishery products due to supply-demand instability was significant, and the sharp rise in rent prices also intensified concerns about the burden on 'low-income household prices.'

According to the 'February Consumer Price Trends' released by Statistics Korea on the 4th, the consumer price index last month was 107.00 (2015=100), up 1.1% from the same month last year, the highest increase since February last year (1.1%) when COVID-19 began spreading. This also ended four consecutive months of sub-1% inflation in October (0.1%), November (0.6%), December (0.5%) last year, and January (0.6%) this year.

Agricultural, livestock, and fishery products surged 16.2%, marking the largest increase in 10 years since February 2011 (17.1%). Due to poor weather conditions causing poor harvests, green onion prices soared 227.5%, and apple prices rose 55.2%. Egg prices increased 41.7% due to the culling of laying hens caused by the spread of highly pathogenic avian influenza (AI) and a surge in demand during the holidays. Pork and domestic beef prices also rose 18.0% and 11.2%, respectively, due to increased household demand.

Statistics Korea expects inflation to continue next month. Eo Unseon, Statistics Korea's Economic Trend Statistics Officer, said, "Supply-demand factors for agricultural and livestock products are expected to improve, so they are neutral, but oil prices could have a significant impact," adding, "Downward pressure on prices is decreasing, but there is a subtle upward pressure due to expectations of increased demand from economic recovery." However, despite inflationary factors, a continuous surge in prices is not anticipated. Officer Eo said, "While it is possible to predict that inflationary pressures from supply and demand sides will continue, efforts by price authorities and economic officials will be made, and currently, the situation is not one to worry about inflation."