Rising Bond Yields, But Interest Rates Remain Low? Outlook for Rate Hikes in South Korea Dims

[Block Media Reporter Lee Jeong-hwa]

As bond yields surge in the global bond market, analyses suggest that the necessity for further interest rate hikes by major central banks may diminish. The selling pressure on government bonds in the U.S., Europe, and Japan has caused market interest rates to soar to their highest levels in years, resulting in a tightening effect on financial conditions even without direct rate increases from central banks. However, concerns over rising international oil prices and fiscal deficits in major countries persist, indicating that the rise in bond yields could alleviate monetary policy burdens while simultaneously increasing the risk of economic slowdown.

According to Bloomberg on the 11th (local time), the ongoing selling pressure in the global bond market has led to a reduction of about 200 basis points (1 bp = 0.01 percentage points) in the interest rate hike outlook for the eight major economies since mid-last month. The cumulative expected rate hike has decreased from 717 basis points in September to 539 basis points recently. Last month, the outlook for rate hikes had expanded to its highest level since 2022, but investor expectations have shifted following the surge in bond yields.

The rise in bond yields increases borrowing costs for businesses and households, which can dampen consumption and investment. This means that even if central banks do not raise interest rates, higher funding costs in the market can produce effects similar to monetary tightening.

Global Bond Yields at Their Highest Since 2000... Rate Hike Outlook in South Korea Also Dims

Recently, global bond yields have risen due to concerns over increased fiscal spending in major countries and large-scale bond issuances by AI-related companies.

The average yield on global government bonds has surpassed 4%, marking the highest level since 2000. Concerns over fiscal soundness in major countries like the U.S., Japan, and France have led investors to demand higher yields as compensation for holding long-term government bonds.

The yield on U.S. 10-year government bonds has risen by more than 70 basis points in the second half of this year. During the same period, Japan's yield rose by 31 basis points, Germany's by 61 basis points, and France's by 121 basis points. In particular, the rise in French yields is interpreted as a result of increased anxiety regarding fiscal projections.

The rise in market interest rates is also spreading to the mortgage and speculative-grade corporate bond markets. As funding costs for households and businesses increase, the monetary tightening that central banks aimed to achieve through additional rate hikes is already taking place in the market.

This trend has led to a rapid retreat in the outlook for interest rate hikes in major countries. According to Bloomberg's data, Australia saw the largest reduction in rate hike expectations, followed by the Eurozone, South Korea, and Canada.

Ken Orchard, head of international bonds at T. Rowe Price, explained that as the market reflects stronger tightening, actual financial conditions become tighter, which may reduce the extent to which central banks need or can implement further rate hikes.

Wall Street: "Attractiveness of Government Bonds Has Increased"... Pressure on Fed for Further Hikes Eases

Global investment banks are noting that the recent surge in bond yields could alleviate the tightening burden on central banks.

J.P. Morgan Private Bank assessed that major country bond markets are overly reflecting the risks of additional interest rate hikes. The economic shocks from war are likely to pressure growth rates, making it difficult for central banks to raise rates as much as the market expects.

Tang Yu-xuan, head of Asia rates and FX strategy at J.P. Morgan Private Bank, stated that central banks need to find a balance between short-term inflation risks and economic growth slowdowns.

He evaluated that the recent surge in bond yields has increased the investment attractiveness of high-quality bonds. This is because it allows for preparation against economic slowdown risks while improving expected returns relative to investment risks due to the higher interest rate levels.

Deutsche Bank is also seeking investment opportunities in U.S. government bonds. Christian Nolting, Global Chief Investment Officer (CIO) at Deutsche Bank Private Banking, predicted that the current energy supply uncertainties would not persist permanently.

He analyzed that there is a possibility of improvement in energy market conditions and a slowdown in inflation, making it difficult to conclude that major countries have entered a full-fledged interest rate hike cycle.

Barclays also assessed that the tightening effect of the bond market itself is reducing the need for further rate hikes by the U.S. Federal Reserve (Fed). Some of the rise in bond yields occurred independently of the Fed's outlook for additional hikes, suggesting that under similar conditions, there is less reason for the Fed to rush to raise rates.

However, they also stated that the possibility of additional tightening in response to inflation risks has not disappeared.

International Oil Prices Above $100 and Fiscal Deficit Burdens... Uncertainty Surrounds Decline in Bond Yields

On the other hand, there are counterarguments suggesting that the market is underestimating the possibility of further rate hikes.

This is due to the situation where international oil prices are above $100 per barrel, coupled with ongoing attacks on oil tankers in the Strait of Hormuz by Iran. If energy price increases persist, inflation pressures may not easily ease, leading to the possibility that central banks will need to maintain their tightening stance.

Former President Donald Trump has stated that he will not attack Iran before the midterm elections in November, but geopolitical uncertainties in the Middle East remain high.

The real economy's ability to withstand higher-than-expected interest rates and uncertainties is also a variable. Michael Ball, Bloomberg's macroeconomic strategist, analyzed that economic activity is showing a more resilient trend than expected despite repeated financial tightening, reinforcing the perception that the appropriate level of interest rates may be higher than previously anticipated.

Concerns over fiscal soundness may also limit declines in long-term bond yields. Even if central banks halt rate hikes considering economic slowdowns, if concerns over government debt and increased fiscal spending persist, investors may demand higher risk premiums for long-term government bonds.

Kenneth Goh, head of private wealth management at UOB Kay Hian, explained that even if central banks stop tightening due to clear signs of economic slowdown, the decline in long-term bond yields may be limited due to fiscal concerns.

The U.S. and Japanese governments are also sending messages to calm concerns in the bond market. U.S. Treasury Secretary Scott Vessenet emphasized that the U.S. borrowing burden can improve rapidly through enhanced economic growth and spending restraint.

Japanese Prime Minister Sanae Takaiichi also stated that the government is prepared to review its spending and revenue plans if bond yields move differently than expected.

Ultimately, the direction of the global bond market is expected to be influenced not only by central banks' interest rate decisions but also by international oil prices, inflation, and fiscal policies of major countries.

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