With a supplementary budget of 30 trillion won, the issuance of approximately 20 trillion won in additional Government Bonds is expected, drawing attention in the market to the direction of bond interest rates. If bond interest rates rise, the government's interest expense will increase and lead to a chain reaction of rising market interest rates, increasing the funding expense for corporations.
According to comprehensive reporting, the immediate direction of interest rates is unclear. Besides economic indicators that influence interest rates, the 'U.S. tariff policy,' which changes in real-time, acts as both an upward and downward factor for interest rates, along with important variables like the ongoing 'tax cut plan of the Donald Trump administration' and the 'Israel-Iran war.'
◇ U.S. tariff relaxation and interest rate outlook… experts are divided
According to the financial sector on the 24th, bond interest rates are closely related to growth and prices. When the economy grows and prices rise, bond interest rates also tend to jump. This is why predicting bond interest rates is easier when specific events push the economy and prices in the same direction.
However, if the two factors move in opposing directions, the outcome becomes complicated. The trade negotiations between the U.S. and the U.K. are a good example.
On the 16th (local time), U.S. President Donald Trump signed a trade agreement with U.K. Prime Minister Keir Starmer, but the outcome was different from the previously demonstrated hardline stance. The U.S. initially stated it would impose a 27.5% tariff on British cars but decided to reduce it to 10% for 100,000 units through negotiations.
This U.S. tariff relaxation has opposite effects on economic growth and prices. Lowering the tariff rate normalizes exports, leading to economic recovery and potentially lower prices. Consequently, the focus on where emphasis is placed leads to differences in interest rate forecasts among experts.
Jo Yong-gu, a researcher at Shinyoung Securities, analyzed that "if (the U.S.) tariffs retreat from previous levels, it will offset signs of economic slowdown," noting that this could be a factor that leads to rising interest rates. This perspective considers economic growth to have more influence.
On the other hand, Yoon Yeo-sam, a researcher at MERITZ Securities, believed that the impact on prices is significant. Yoon stated, "(A U.S.) tariff reduction is a direct remedy for inflation," adding that "the U.S. lowering uncertainty during negotiations is positive for the (bond) market."
◇ Although it has risen to the Senate… Trump's tax cut plan may receive dissenting votes
Another factor affecting bond interest rates is the U.S. fiscal deficit. If concerns about U.S. debt arise, it leads to a rise in global interest rates. Last month, the Ministry of Economy and Finance cited the widening U.S. fiscal deficit as one reason for the increase in Korean Government Bond rates compared to the previous month.
Over the next decade, the U.S. fiscal deficit is expected to increase by $3.8 trillion (5,252 trillion won). This is attributable to the passage of Trump's tax cut plan in the U.S. House of Representatives, which has now moved to the Senate. The main provisions of the tax cut plan extend the reduction of individual income tax rates and corporate tax rate caps, as well as the expansion of standard deductions and child tax credits, which were set to expire at the end of this year. Due to the substantial size of the tax cut, the Congressional Budget Office (CBO) indicated that this bill will lead to an increase in the budget deficit approaching $4 trillion if passed in the Senate.
Currently, the U.S. debt stands at $36.2 trillion (approximately 5 quadrillion won). On the 16th, Moody's Investor Service stated, "Over the past decade, (the U.S.) debt has sharply increased due to persistent fiscal deficits," adding that "as the fiscal deficit and debt rise and interest rates increase, the interest payments on government liabilities have also risen significantly." Moody's then downgraded the U.S. credit rating from the top tier of 'Aaa' to 'Aa1.'
However, if even a few Republican senators defect, President Trump's tax cut plan will be defeated. Currently, 53 of the 100 seats in the U.S. Senate belong to the Republican Party, which Trump is a part of. The remaining 47 seats belong to the Democratic Party, meaning that if just four Republican votes are lost, the tax cut plan cannot pass through Congress.
◇ Uncertain geopolitical conflicts in the Middle East
The recently erupted Israel-Iran war is also a variable, as it directly impacts international oil prices. If oil prices soar, raw material costs will also rise, hitting prices hard and exerting upward pressure on interest rates. On the 13th, when Israel launched an airstrike on Iran, the price of West Texas Intermediate (WTI) crude oil for July delivery jumped by 7.3% on the New York Mercantile Exchange compared to the previous day.
The situation in this war is changing rapidly, making predictions challenging. On the 16th, the third day of mutual attacks, The Wall Street Journal reported that Iran expressed to Israel its desire to cease mutual attacks and resume nuclear negotiations. As a result, the WTI for July delivery fell by 1.66% from the previous session. The August delivery price of Brent crude also dropped by 1.35%.
However, the conflict between the two sides continues. On the 22nd, the U.S. airstrikes on the Iranian Fordow nuclear facility seemed to escalate tensions further. In response to the U.S. attack, Iran's parliament passed a resolution to block the Strait of Hormuz. Since the Strait of Hormuz is responsible for 20-30% of global oil and liquefied natural gas (LNG) transportation, the threat of its blockage has led oil prices to fluctuate again. On that day, WTI for July delivery and Brent crude for August delivery showed an increase of over 3%.
However, the resolution to block the Strait has only been passed in the parliament and has not yet materialized. The final decision regarding the blockade of the Strait is held by Iran's Supreme National Security Council (SNSC).
Ha Geon-hyeong, a researcher at Shinhan Investment Corp., projected that if Iran fully blocks the Strait of Hormuz or if Israel escalates to an uncontrollable all-out war against Iran, the real economy and financial markets will face the worst-case scenario.