U.S. and Iran military clashes are pushing up yields on U.S. Government Bonds. Geopolitical tensions from the Middle East are lifting international oil prices, heightening fears of reignited inflation, which in turn has weakened expectations that the U.S. Federal Reserve (Fed) will cut its benchmark rate.
On U.S. Government Bonds, yields on medium- and long-dated notes are rising more steeply than on short-dated ones. This is seen as investor sentiment being more heavily influenced by inflation, fiscal conditions, and Government Bonds supply-demand pressures.
According to the financial investment industry on the 15th, on the 13th (local time) the U.S. Government Bonds 2-year yield rose to 3.734%, marking a record high in about seven months since Aug. 21 last year (3.792%).
The 10-year yield also climbed to 4.285%, up 29.5 bp from late Feb. The 30-year yield rose 29.5 bp to 4.908%, nearing the 5% level. The 1-year U.S. Government Bonds yield likewise gained 16.7 bp, from 3.477% in late Feb. to 3.644% on the 13th.
The recent rise in U.S. Government Bonds yields is interpreted as stemming from a surge in oil prices due to heightened tensions in the Middle East, the spread of inflation concerns, and weakened expectations of Fed rate cuts.
Typically, when geopolitical risks grow, preference for safe assets increases and buying flows into U.S. Government Bonds, but this time concerns that rising energy prices could reignite future inflation appear to be playing a bigger role.
What stands out is that yields on medium- and long-dated notes rose more than on short-dated ones. This can be seen as a so-called bear steepening, in which long-dated yields climb faster than short-dated ones. It means the market has begun to price structural factors—such as long-term fiscal soundness, inflation, and bond supply-demand—more than the question of whether the Fed will cut its policy rate.
In a phase where the possibility of a prolonged war is being discussed, the likelihood of a wider U.S. fiscal deficit and increased Government Bonds issuance is also easily highlighted. Accordingly, the term premium—the risk compensation for holding long-term bonds—is seen rising, pushing up long-term yields.
U.S. President Donald Trump is pressuring the Fed to cut rates immediately. But in the market, the view is prevalent that as long as the war with Iran continues, the upside pressure on long-dated yields will be hard to break. Expectations for a policy rate cut alone are unlikely to ease oil prices, inflation expectations, and concerns over long-term fiscal conditions.
The U.S.-driven rise in yields was reflected immediately in Korea's bond market. According to the Korea Financial Investment Association, as of the 13th the 3-year Treasury bond yield was 3.338%, hitting a record high in 1 year and 9 months since June 2024. As recently as on the 27th of last month it was 3.041%, but it began rising this month and jumped 0.297 percentage point in just half a month.
On the same day, the 5-year Treasury bond yield stood at 3.556%, up 0.278 percentage point over the same period, and the 10-year yield climbed to 3.701%, up 0.255 percentage point. In the domestic market as well, both medium- and long-dated yields are rising rapidly together.
The financial investment industry analyzes that heightened bond-market volatility could weigh on the stock market. If global rate volatility grows, foreigners may reduce their exposure to risk assets and, in the process, lower their weighting in Korean equities as well.
The rise in long-term yields also raises overall funding expenses for corporations and pressures revenue. Growth stocks such as tech and biotech, which have a high share of future earnings, are inevitably more affected by a higher discount rate.