Korean Treasury Bond Yields Near 4% Again, Raising Interest Bills for Companies and Households [fn Market Watch]

[Financial News] Korean Treasury bond yields have once again moved close to their annual highs. The rise in U.S. Treasury yields and inflation concerns stemming from higher international oil prices are coinciding with the possibility of another Bank of Korea rate hike. The impact of rising Treasury bond yields is not confined to the bond market. A “high-interest-rate domino” is emerging, pushing up household interest burdens, including mortgage payments, through financial bond yields such as those on bank bonds.
■Three-year Treasury bond yield again nears 3.9%According to the Korea Financial Investment Association’s Bond Information Center on the 2nd, the three-year Korean Treasury bond yield closed at 3.878% annually on the 1st. After reaching an annual high of 3.959% on July 24, the yield fell into the 3.7% range at one point last month. It has since risen again and is now close to the 3.9% mark. The 10-year Treasury bond yield also climbed to 4.371% annually.
The increase is even more pronounced compared with the beginning of the year. The three-year Treasury bond yield, which stood at 2.935% annually on January 2, the first trading day of the year, rose 94.3 basis points in eight months. Over the same period, the 10-year yield jumped 98.5 basis points, from 3.386% to 4.371% annually.
There are also considerable factors that could drive yields higher. The U.S. 10-year Treasury yield reached 4.79% on the 1st local time, its highest level in 19 months since January last year. As concerns about inflation fueled by rising international oil prices grow, the possibility of additional rate hikes by the Federal Reserve System (Fed) is also keeping markets on alert.
The possibility of another rate hike remains open in South Korea as well. The Bank of Korea’s Monetary Policy Board raised the policy rate by 25 basis points from 2.75% to 3.00% annually on the 27th of last month, marking two consecutive increases.
Park Jun-woo, a researcher at Hana Securities, analyzed, "What matters now is not the timing of an additional hike but how high the terminal policy rate will go. The current bond market has not yet fully priced in a terminal policy rate of 3.5% annually." Hana Securities expects the policy rate to reach 3.5% annually after additional hikes in November and February next year.
The firm also sees the peak in yields rising above current levels. Hana Securities forecast that, during the fourth quarter, the three-year and 10-year Treasury bond yields could climb to 4.3% and 4.7% annually, respectively. Park said, "If the current growth outlook is maintained, the possibility that the tightening cycle will end early is low. Even if the pace of hikes is moderated, yields are highly likely to rise once more as the bond market moves to reflect the terminal rate."
■From companies to households: Mortgage rates rise for third straight monthThe impact of rising yields originating from Korean Treasury bonds is already appearing in the corporate funding market. In the recent corporate bond market, private bonds issued by A-rated companies have risen to the 6% range, while perpetual bonds have reached the 7% range. Even highly rated companies are now raising funds at rates in the 5% range.
Household lending is also under pressure. According to the Bank of Korea (BOK), the interest rate on household loans issued by deposit-taking banks in July rose 0.14 percentage points from the previous month to 4.64% annually. Mortgage rates increased 0.12 percentage points to 4.48% annually, marking a third consecutive monthly rise.
Mortgage rates are also rising at a faster pace. The month-on-month increase widened from 0.01 percentage points in May to 0.04 percentage points in June and 0.12 percentage points in July. Rates on ordinary unsecured loans also climbed to 5.97% annually.
Given the trend in market rates, further upward pressure on lending rates remains. As of the end of last month, the upper end of five-year fixed-rate mortgage rates at the five major banks had exceeded 7%.
The five-year bank bond yield, one of the key benchmarks for fixed-rate and periodic-reset mortgages, is also rising. It increased from 4.241% annually at the end of June to 4.343% at the end of July and 4.382% at the end of August, rising for two consecutive months. When banks’ funding costs increase, the change is reflected, with a time lag, in new loans and mortgages whose rates are being reset.
Variable-rate mortgages are not immune either. COFIX, a key benchmark for variable-rate mortgages based on newly issued loans, rose from 3.05% annually in June to 3.18% in July, marking a fourth consecutive monthly increase.

[email protected] Kim Hyun-jung Reporter