US Tightening and 50 Trillion Won Supplementary Budget Trigger 'Interest Rate Spasm'... Government Bond Yields Rise Over 1%p This Year

[Asia Economy Sejong=Reporter Kwon Haeyoung] Bond yields are rising sharply due to the tightening stance of the United States and other global countries, as well as the possibility of an additional supplementary budget (추경) worth 50 trillion won.

According to the Korea Financial Investment Association on the 10th, the final yield of the 3-year maturity government bond in the Seoul bond market on the 8th recorded an annual rate of 2.987%. Compared to the year-end closing of 1.798% last year, it has risen by 1.189 percentage points this year. The yields on 2-year and 5-year bonds also surged by more than 1 percentage point each.

Since the beginning of the year, the possibility of tightening by the U.S. Federal Reserve and the announcement of a large-scale second supplementary budget have caused a spasm in government bond yields. In particular, since issuing deficit bonds is inevitable to secure tens of trillions of won in supplementary budget funds, concerns are growing in a market where there is virtually little remaining capacity for government bond investment. When government bonds flood the market, bond prices fall and bond yields rise.

The rise in raw material prices and inflationary pressures due to Russia's invasion of Ukraine have also contributed to pushing up interest rates.

Government bond yields are driving up corporate bond and bank bond yields, increasing the funding burden on companies and households. The 5-year bank bond (AAA, unsecured), mainly used as an indicator for fixed-rate mortgage loans, recorded an annual rate of 3.352% on the 8th based on the average rate from private bond rating companies (Minpyeong), rising 1.093 percentage points this year. As a result, fixed mortgage loan rates at commercial banks have risen by more than 1 percentage point this year alone, recently exceeding a maximum rate of 6%.

The 3-year corporate bond (AA-, unsecured) yield also surged from 2.415% at the end of last year to 3.636% on the 8th, an increase of 1.221 percentage points, intensifying the funding burden on companies.