U.S. President Donald Trump directly referenced concerns in the bond market as a backdrop to his decision to delay the implementation of a "reciprocal tariff" for 90 days, highlighting the significance of U.S. interest rate trends as a major variable in the global economy. Experts note that while the recent surge in Government Bonds yields could affect the Korean economy, it is essential to prepare for long-term uncertainties rather than short-term impacts.
◇ U.S. Government Bonds yields for 10-year notes rise to 4.5% and 30-year notes to 5.0%
According to the U.S. Treasury on the 14th, the yield on the 10-year Government Bonds reached 4.48% on the 11th (local time), up by 0.08 percentage points from the previous trading day. This is the highest level since February 20 (4.50%). As bond prices move inversely to yields, this indicates that investors significantly sold off U.S. Government Bonds.
Just a week earlier on the 3rd, the yield on the U.S. 10-year notes had fallen to 4.06%, marking the lowest level since October 16 of last year (4.02%). Following President Trump's announcement regarding the reciprocal tariff, demand for bonds increased due to a preference for safe assets. However, sentiment reversed once the reciprocal tariff actually took effect.
Mid- to long-term Government Bonds yields also rose sharply. As of the 4th, the yields for 20-year and 30-year notes stood at 4.44% and 4.41%, respectively, but rebounded to 4.78% and 4.72% on the 9th. In the case of the 30-year notes, yields rose to 5.0% shortly after the implementation of the reciprocal tariff. On the 11th, mid- to long-term yields expanded further, closing at 4.91% for 20-year notes and 4.85% for 30-year notes.
Various interpretations have emerged regarding the backdrop to this sharp increase in Government Bonds yields. Firstly, there is speculation that foreign holders, including China, sold off U.S. Government Bonds. Kim Sang-hoon, a researcher at Hana Securities, noted that "given the rapid rise in U.S. Government Bonds yields in Asian markets, China's retaliatory actions cannot be ruled out," and mentioned that China reduced its holdings of U.S. Government Bonds by a total of 10.8% from August 2017, when Trump took office, until December 2020, the end of his first term.
Researcher Kim analyzed that if the past reductions in China's holdings of U.S. Government Bonds were applied to the $760.8 billion holding as of January when Trump’s second administration began, a total of $81.9 billion could have been reduced. He also mentioned that based on the historical yield trends during the first term of the Trump administration, if China sells $1 billion of U.S. Government Bonds, the 10-year yield would increase by 6.7 basis points (1 basis point = 0.01 percentage points) and the 30-year yield by 8.1 basis points.
There's also an analysis suggesting that the pressures from the liquidation of hedge fund leverage (borrowed investments) have increased. Hedge funds typically employ a "basis trading" strategy, taking advantage of price differences between cash and futures of U.S. Government Bonds to generate revenue. It is generally known that this process leverages dozens of times the original investment.
However, when the cash price surges (and yields drop), losses for funds betting on price declines grow, leading collateral to move to banks, which sell Government Bonds to recover cash, thus liquidating trades. The interpretation is that since U.S. Government Bonds yields fell on the 3rd, this path was followed, releasing U.S. Government Bonds into the market and causing yields to spike.
Consequently, it is suggested that the Trump administration acted to calm market uncertainties. If Government Bonds yields continue to rise, the interest burden on U.S. government expenditures will increase, potentially accelerating the expansion of the fiscal deficit. Kang Seung-won, a bond strategist at NH Investment & Securities, said, "It has been confirmed that the yields of 4.5% for 10-year notes and 5.5% for 30-year notes are the exercise prices for the 'Trump Put,'" adding, "Considering the serious fiscal deficit in the U.S., it seems to be a strategy aimed at artificially lowering interest rates and stimulating the economy."
The term "Trump Put" refers to the expectation that if the market significantly declines or volatility increases sharply, the Trump administration would take immediate market-boosting measures through tax cuts or regulatory relaxations.
◇ Recent alignment of Korean and U.S. interest rates has increased... Government Bonds yields are also rising
It is not expected that rising yields on U.S. Government Bonds will significantly impact the Korean economy immediately. Traditionally, Korean Government Bonds yields have tended to correlate with U.S. Government Bonds yields; however, this correlation has weakened since October last year. According to a report published by the Bank of Korea in December last year titled "Key Features and Assessment of Recent Domestic Long-term Interest Rate Movements," Korean Government Bonds yields showed limited upward trends despite a significant rise in U.S. yields since October.
However, the recent stronger correlation in yields is a cause for concern. An official from the Bank of Korea noted, "While the variations in Government Bonds yields were limited compared to movements in U.S. Treasury yields, since the end of March, when U.S. Treasury yields declined, Korean Government Bonds yields have also shown a significant decline. Recently, after U.S. Government Bonds yields rose again, there has been a tendency for our Government Bonds yields to either see limited declines or even slight increases."
Looking at our country’s Government Bonds end yields, they have shown similar trends to U.S. yields this month. The yield on the 10-year Government Bonds fell from 2.738% on the 3rd, the day the reciprocal tariff was announced, to 2.648% on the 7th, and then rose to 2.732% on the 9th, when the tariff took effect. On the 10th, when the reciprocal tariff was deferred, it dropped again to 2.702%. The 30-year Government Bonds yield also decreased from 2.559% on the 3rd to 2.570% on the 7th, then increased to 2.652% on the 9th.
If the rising trend in U.S. Government Bonds yields continues, it could affect the Bank of Korea's monetary policy direction. An increase in Government Bonds yields leads to higher interest burdens for households and corporations, potentially dampening consumer sentiment. This may raise the necessity for the Bank of Korea to lower interest rates.
Warnings have emerged that prolonged uncertainty in U.S. policies and volatility in U.S. Government Bonds yields could depress corporate investment sentiment. This could deepen domestic sluggishness, exerting downward pressure on the economy. Already, some foreign investment banks like JP Morgan have projected that the GDP growth rate for our country could be around 0.7% this year, which falls below the Bank of Korea's forecast (1.5%).
Kang Seung-won, a bond strategist at NH Investment & Securities, stated, "This time, while the surge in U.S. Government Bonds yields was moderated by the tariff deferral, we avoided it evolving into structural risks. However, if uncertainty increases, corporate long-term investments will decline, and the real economy will be contracted," adding, "It will be particularly difficult for favorable economic indicators to emerge in an environment where the government is reducing expenditures."