Major Countries' Interest Rate Hikes Cause Market Rates to Surge... "Limited Room for Further Increase"

[Asia Economy Reporter Minji Lee] As major countries including the United States continue their interest rate hike policies, market bond yields are soaring.

According to the Korea Financial Investment Association on the 11th, as of the 8th of this month, the final bid yield on 3-year Treasury bonds in the Seoul bond market recorded an annual rate of 3.543%. Compared to the year-end closing rate of 1.798% last year, this marks a rise of 174.5 basis points (1bp = 0.01 percentage points) this year. Based on the annual peak of 3.778% recorded on the 1st, it has risen by 198bp, nearly 2 percentage points.

Short-term and long-term bonds other than the 3-year bonds also recorded increases exceeding 1 percentage point (p). As of the 8th of this month, the yields on 2-year and 5-year bonds rose by 185.6bp and 159.6bp respectively this year. The 10-year (137.4bp), 20-year (120.5bp), 30-year (115.4bp), and 50-year (110.6bp) bonds also showed sharp increases, rising from the 1% range to the 3% range.

As the U.S. Federal Reserve (Fed) and other global central banks continue their monetary tightening policies to control inflation, market interest rates are also reaching new highs. The Fed is expected to raise rates by 0.75 percentage points at this month’s Federal Open Market Committee (FOMC) meeting.

Since Fed Chair Jerome Powell’s hawkish remarks at the Jackson Hole speech last month, Fed officials have joined in, intensifying market caution regarding interest rate hikes. The European Central Bank (ECB) also surprised markets by raising its key interest rate from 0.5% to 1.25% by 0.75 percentage points on the 8th (local time) to curb inflation. The Bank of Canada also implemented a 0.75 percentage point rate hike.

With Treasury bonds surging, yields on other bonds such as corporate bonds have also skyrocketed, signaling a red light for corporate financing. On the 8th, the yield on 3-year unsecured corporate bonds rated AA- was 4.541% annually, sharply up from 2.415% at the end of last year. The yield on 3-year unsecured corporate bonds rated BBB- also rose significantly to 10.398% annually, compared to 8.270% at the end of last year. On the 1st of this month, yields for AA- and BBB- rated bonds reached annual peaks of 4.747% and 10.605%, respectively.

However, some bond market experts believe that if the benchmark interest rate does not deviate significantly from the current expected range (3.25?3.50%), the potential for a sharp rise in bond yields is limited. If next week’s U.S. CPI confirms a further easing of inflationary pressures (from 9.1% in June to an expected 8.1% in August), the rapid rise in rates is also expected to be limited. Kim Ji-man, a researcher at Samsung Securities, said, “In the case of domestic long-term bonds, there is room for an increase as the inverted U.S. yield curve normalizes, but for the mid- to short-term segment under 3 years, the peak has already passed.”