The KOSPI, which had topped the 7,000 level intraday the previous day, tumbled again in a day. The won-dollar exchange rate has stabilized recently and concerns about artificial intelligence (AI) investment and the memory cycle have eased somewhat, but investor sentiment froze again as U.S. long-term Government Bonds yields surged. Analysts said the U.S.-driven rate shock could make it harder for the Bank of Korea to cut its policy rate and raise funding burdens for corporations, weighing on a rebound in the domestic stock market.
On the 19th, the KOSPI fell more than 5% from the previous trading day, losing the 6,500 mark. As the plunge deepened, a sell-sidecar was triggered on the main board. Foreign investors, who had been net buyers recently, turned net sellers of more than 3 trillion won on the day. Among Asian markets, the KOSPI's decline stood out, and Samsung Electronics and SK hynix fell about 7% and 9%, respectively.
The biggest driver is U.S. long-term rates. The U.S. 30-year Government Bonds yield recently spiked to as high as 5.337% intraday, the highest since 2007. The 10-year is also hovering in the mid-4.7% range. Concerns that Government Bonds supply will increase due to the widening U.S. fiscal deficit, coupled with big tech corporations issuing corporate bonds to fund AI data center investments, have added to supply pressure in the bond market. On top of that, higher oil prices driven by Middle East tensions are blocking rates from falling.
With Government Bonds and corporate bond supply hitting the market at the same time and buying power failing to keep up, issuers are effectively caught in a vicious cycle of having to offer higher rates to attract investors. Han Ji-young, a Kiwoom Securities researcher, said, "Government Bonds issuance to cover fiscal deficits in major countries and corporate bond financing for big techs' AI investments are increasing, while long-term funds from the Central Bank and insurers are not keeping pace with the supply growth," adding, "Accordingly, we judge that the market is demanding higher rates."
There are also warnings that if long-term rates rise further, the very flow of money heading into the stock market could change. Lee Eun-taek, head of research at KB Securities, said at a press briefing at the Korea Exchange (KRX) the previous day, "If the U.S. 10-year Government Bonds yield breaks above the low-5% range on a sustained basis, it could be a warning signal for equities." The explanation is that if Government Bonds alone can generate high returns, capital providers such as banks and pension funds will have less incentive to take greater risks to supply funds to AI corporations or data centers.
In particular, the rise in U.S. Government Bonds yields is stoking the exchange rate and corporations' funding expenses, adding more pressure to the KOSPI. As long as the United States keeps rates high, the Bank of Korea cannot be free. To prevent the Korea-U.S. rate gap from widening and to defend against a weaker won, it has little choice but to raise the base rate further or keep a high-rate stance for longer. In that case, domestic bond yields could also remain elevated, and corporations would have to shoulder higher interest in issuing or refinancing corporate bonds.
Shock is already showing up in the domestic bond market. On the 18th, the 30-year Treasury bond yield rose to 4.751%, a record high since its issuance in 2012. From the stock market's perspective as well, the higher the yield on safe assets like bonds, the less attractive growth stocks become—those that had commanded high valuations based on future growth potential.
Japanese rates are also a variable. Japan's 10-year Government Bonds yield is nearing 3%, rising to a 30-year high. If yields on Japanese bonds increase, life insurers and pension funds could sell U.S. Government Bonds and return to domestic bonds, prompting "repatriation (the return of funds by Japanese institutional investors)." If Japanese money pulls out, demand for U.S. Government Bonds could fall and yields could rise further.
Park Sang-hyun, a researcher at iM Securities, said, "Behind the recent strengthening of rate synchronization between the United States and Japan is concern about shifts in Japanese capital flows," adding, "With the surge in Japanese Government Bonds yields and higher hedging expenses due to the weak yen, funds from Japanese life insurers and pension funds that had invested overseas are more likely to return to Japan."
Still, there is also a view that the recent rate spike will not last long. Kim Byung-yeon, head of investment strategy at NH Investment & Securities, said, "The recent rise in rates is largely due to the short-term burden of digesting concentrated Government Bonds issuance and heightened tensions between the United States and Iran," adding, "The supply-demand burden from Government Bonds issuance has already been absorbed, and the likelihood of military tensions in the Middle East easing is high, so U.S. long-term Government Bonds yields are likely to stabilize lower."