US, UK, and Japanese bond yields surge simultaneously, triggering a potential risk for the Korean stock market
10-year U.S. Treasury note.
The yield on the 10-year US Treasury note, considered the representative long-term interest rate of the United States and a barometer of the global economy, has breached the psychological resistance line of the market at 4.5%. UK and Japanese government bond yields have also surged simultaneously to multi-decade highs, emerging as a new time bomb for the global economy.
According to the financial investment industry on May 18, the 10-year US Treasury yield closed at 4.595% on May 16 (local time), up 0.136 points (p) from the previous day. This is the highest level in about 19 years since July 2007, just before the global financial crisis.
The UK 30-year government bond yield also hit a multi-decade high, and the Japanese 10-year government bond yield soared to its highest level in 29 years since 1997. Since the end of February, when the US-Iran war began, the UK 10-year government bond yield has spiked by 0.94% points, and the Japanese 10-year government bond yield has risen by 0.76% points.
The background behind the simultaneous surge in global bond yields is complex. As the US inflation data for April delivered a shock, concerns over interest rate hikes by central banks of major countries grew, while a rapid increase in war expenditure due to the prolonged war led to fears of an expanding US fiscal deficit.
In the UK, the ruling Labour Party’s crushing defeat in the local elections and a plan to increase defense spending by 18 billion pounds amplified concerns over fiscal risks. The possibility of an early additional interest rate hike by the Bank of Japan and the potential for Japanese pension funds to expand their investments in domestic government bonds also acted as negative factors for the global bond market. Anxiety over the new Federal Reserve Chairman Kevin Warsh’s regime and the outflow of funds from the bond market driven by a global stock price rally further fueled the surge in yields.
In the securities industry, the psychological resistance line for the 10-year US Treasury yield is generally considered to be 4.5%. Kim Seok-hwan, a researcher at Mirae Asset Securities, stated, “The market defines the 10-year US Treasury yield of 4.5% as a ‘pain point’, and when it exceeds this level, it has often served as a catalyst for a stock market correction.”
In fact, after the 10-year US Treasury yield peaked at 4.792% on January 14 of last year, the Nasdaq index fell by 19.83% over about three months, and the S&P 500 also dropped by 14.72% during the same period.
Concerns are rising that the Korean stock market could also take a direct hit. This is because foreign investors, who have begun reducing their proportion of risk assets due to rising bond yields, may lower their weighting in Korean equities, which are classified as an emerging market.
Actually, from May 7 to May 15, foreign investors exhibited a net selling trend for 7 consecutive trading days on the KOSPI, dumping 31.8908 trillion won (approximately $21.69 billion). The rise in the dollar-won exchange rate and the KOSPI index, which surged in a short period, could also continuously stimulate foreign investors’ desire to realize profits.
In particular, if the upward trend in bond yields is prolonged, there is also the possibility discussed that the growth momentum of semiconductor companies such as Samsung Electronics and SK Hynix may shrink more than expected as global big tech companies, facing increased capital procurement costs, begin to adjust the pace of their AI server capital expenditures (CAPEX). In a structure where 60% of the KOSPI’s profits come from semiconductors, a downturn in the semiconductor industry conditions means that the entire index could be shaken.
Park Sang-hyun, a researcher at iM Securities, also diagnosed through a report, “As the 10-year US Treasury yield surpassed the 4.5% mark, the global asset market has begun to show a sensitive reaction to bond yields,” adding, “In particular, the phenomenon of surging yields on ultra-long-term government bonds is highly unusual.”
Nevertheless, Researcher Park viewed the possibility of a full-fledged credit crunch as low. John Williams, President of the Federal Reserve Bank of New York, stated on May 14, “I do not feel the need to change the policy rate,” and the probability of an interest rate freeze is being maintained at a high level until the September FOMC meeting.
Supply chain disruption pressures are also not at a concerning level compared to in 2022. This is because market liquidity remains sufficient, as the Secured Overnight Financing Rate (SOFR), a major benchmark interest rate in the US money market, continues to trend below the Interest on Reserve Balances (IORB) rate.
Researcher Park stated, “Since the economies of major countries, including the United States, have become somewhat accustomed to the so-called medium-inflation and medium-interest-rate phenomenon, unless bond yields surge additionally due to further increases in oil prices stemming from Iran, the phenomenon of a ‘bond yield tantrum=credit crunch’ will not materialize in earnest.”
However, he emphasized, “Oil price stabilization following the resolution of the Iran risk is an absolutely necessary situation for the downward stabilization of global bond yields.”
Jung Suk-yee
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