[Editorial] Prepare for a Shock to the Domestic Market as Global Long-Term Bond Yields Surge

Long-term government bond yields in major economies, including the United States, Japan and Europe, have surged to their highest levels in years, and in some cases decades. Anxiety is also rising across global financial markets. This sharp increase in long-term yields should not be dismissed as a temporary market fluctuation. It reflects a combination of mounting fiscal deficits, concerns over government bond supply, fears of inflation tied to the prolonged war in the Middle East, and expanding investment in Artificial Intelligence (AI). Governments, companies and households alike must now prepare for a shock driven by higher global interest rates.
On the 18th local time, the yield on the 30-year U.S. Treasury bond briefly rose above 5.33%, marking its highest level in 19 years. The 10-year U.S. Treasury yield, a benchmark for the global bond market, also climbed to around 4.75%, its highest level in 19 months. Japan's 10-year government bond yield likewise jumped to its highest level in 30 years. Long-term bond yields in Germany and Paris, France, also reached their highest levels since 15 and 18 years ago, respectively. Yields on long-term bonds in major economies around the world are rising in unison.
The main backdrop is worsening public finances in many countries. A steep rise in long-term yields can be a warning sign that investors are questioning a country's fiscal soundness. In the United States, national debt is approaching $40 trillion, and the burden of massive war spending is adding to pressure on Treasury supply. Annual interest costs now exceed $1 trillion, roughly equal to the budget of the United States Department of Defense (DoD). On top of that, Big Tech is issuing large volumes of corporate bonds to fund AI infrastructure investment. The strain on bond market supply and demand is inevitable.
The prolonged war in the Middle East is another negative factor. If oil prices rise again, inflation could accelerate and expectations for rate cuts could weaken. Fiscal concerns, inflation and funding demand are all pushing long-term yields higher at the same time. Rising long-term rates are not only a burden for governments. They also raise financing costs for companies and push up long-term borrowing rates for households, including mortgage loans. In the end, this could dampen consumption and investment and deal a blow to the real economy.
South Korea is no exception. The yield on South Korea's 30-year government bond has been rising day after day, reaching 4.751% on the 18th. Higher domestic bond yields could lead to a chain reaction of increases in mortgage and corporate loan rates. The impact could be even greater because household debt is already at a dangerous level.
According to the Bank of Korea (BOK), household credit, which combines household loans and sales credit, stood at 2,019.8 trillion won at the end of the second quarter, surpassing 2,000 trillion won for the first time ever. During the second quarter, housing-related loans rose by 12.1 trillion won, while other loans, including credit loans, increased by 12.8 trillion won. This was the result of both aggressive borrowing and speculative investment. When interest rates rise, the burden of repaying principal and interest grows, and households have less room to spend. That could become another drag on domestic demand, which is already recovering slowly.
The exchange rate is another variable. If demand for safe assets strengthens globally and the dollar remains firm, volatility in the won–dollar exchange rate could widen. It is also possible that foreign capital flows will become unstable, increasing turbulence in the domestic financial market.
The government should first assess the interest burden on vulnerable borrowers and small and medium-sized enterprises. It must also closely examine foreign-currency liquidity and the soundness of financial institutions. If market anxiety deepens, authorities should be ready with liquidity backstops that can be deployed immediately. At the same time, they need to preserve market confidence in medium- to long-term fiscal soundness so that higher spending does not weigh on the country's credit standing or long-term yields. If the global rise in interest rates is a structural trend, South Korea cannot rely on temporary fixes. It is time to examine the fundamentals of households, companies, financial markets and public finances.