While South Korea’s 10-year Treasury bond yields have surged significantly over the past year alongside major advanced economies, a recent analysis shows that the primary driver is not external financial shocks, but an imbalance in domestic bond market supply and demand. As weakening investment demand for long-term government bonds drives up yields, growing concerns mount that this will translate into higher bank funding costs and household loan rates.

According to a report released on the 20th by the Korea Capital Market Institute (KCMI) titled "The Spread of Advanced Country Government Bond Yield Rises and Response of the Korean Treasury Bond Market," the yield on 10-year Korean Treasury bonds (KTBs) jumped from 2.95% to 4.41%—a 1.46 percentage point increase—between the end of September last year and the end of September this year.

Over the same period, government bond yields in major advanced economies rose across the board. Japan’s 10-year bond yield increased by 1.40 percentage points, France by 1.31 percentage points, and the U.S. by 1.14 percentage points. Germany and the United Kingdom also saw increases of 0.87 and 0.73 percentage points, respectively.

However, the underlying causes of the yield hikes varied by country. In the U.S., a shift in monetary policy outlooks and an increase in term premiums—compensation for the risk of holding long-term bonds—worked in tandem. In Japan, the normalization of monetary policy was the main driver, while in France, an expansion of risk premiums due to fiscal and political uncertainties was cited as the primary cause.

In the case of South Korea, domestic factors were found to have a far greater impact than external ones. Based on an analysis of changes in term premiums in the U.S., U.K., and France, KCMI revealed that out of the 1.17 percentage point increase in the term premium for 10-year KTBs over the past year, only 0.13 percentage points could be explained by overseas factors. This indicates that the rise in KTB yields is not a temporary phenomenon triggered by international financial market shocks, but is closely tied to structural changes within the domestic bond market.

The institute particularly highlighted the waning demand from insurance companies, which are major buyers of long-term government bonds. Net purchases of KTBs with a residual maturity exceeding 20 years by insurers fell to between 3.4 trillion and 5.9 trillion won per quarter from the fourth quarter of last year through the second quarter of this year, down from 6 trillion to 9.2 trillion won in the same period a year earlier. Analysts note that alongside this weakened long-term bond demand from insurers, a slowdown in buying momentum from foreign investors and public funds has intensified supply pressures in the ultra-long-term government bond market.

This does not mean that foreign investors have massively pulled their funds out of the domestic bond market. Although foreign net purchases of KTBs plummeted from 35.3 trillion won in the second quarter of this year to 2.6 trillion won in the third quarter, the net-buying trend itself was maintained. However, the significantly reduced purchase volume was pointed out as a factor that may have further weakened overall bond demand.

The government is also taking steps to respond to rising bond yields. After the 10-year KTB yield hit 4.6% on September 15—reaching its highest level since October 2022—the government decided to cut its October KTB issuance volume by 5 trillion won from its initial plan and prematurely buy back approximately 3.5 trillion won worth of government bonds.

Nevertheless, the institute pointed out that the effects of such supply adjustments could be temporary. Rather than relying on short-term responses to curb government bond supply, KCMI advised that authorities should expand the demand base for long-term bonds and improve the issuance structure across different maturities.

The surge in bond yields also places a heavy burden on household and corporate financial costs. Higher KTB yields can exert upward pressure on market rates such as bank bond rates, which in turn feed into bank funding costs and affect fixed-rate mortgage loans and corporate lending rates.

In fact, according to Bank of Korea loan rate statistics for August, mortgage rates rose for the fourth consecutive month, reaching their highest level in 3 years and 9 months.

The institute also warned that future instability in global financial markets could push domestic yields even higher. While domestic factors have driven the rise in yields so far, an escalation of fiscal instability in Europe or a stronger risk-off sentiment among global investors could simultaneously trigger rising overseas yields and foreign capital outflows.

Kang Hyun-joo, a senior research fellow at KCMI, suggested, "Along with enhancing the predictability of KTB supply, there is a need to establish an institutional foundation to manage supply and demand by maturity, such as introducing short-term KTBs over the mid-to-long term and expanding the demand base for pension funds."

[ⓒ Global Economic Times. 무단전재-재배포 금지]