The U.S. 10-year Government Bonds yield is threatening the psychologically critical 5% level. As tensions with Iran drag on, oil has surged above $100, reigniting inflation fears, and even the U.S. Treasury's Government Bonds buyback fell short of market expectations. The market sees a high likelihood that the rise in U.S. Government Bonds yields will continue for the time being, suggesting high rates will weigh on Korea's stock market.
According to Bloomberg on the 11th, the previous day the U.S. 10-year Government Bonds yield rose intraday to 4.927%, the highest since Oct. 2023. The U.S. 30-year Government Bonds yield also jumped about 6.8 basis points (1 bp = 0.01 percentage point) intraday to 5.354%, the highest since June 2007.
It is seen as the result of heightened inflation concerns as oil topped $100. According to the ICE Futures Europe, November Brent crude futures rose 6.34% on the 10th to settle at $107.63 per barrel. On the New York Mercantile Exchange, October West Texas Intermediate (WTI) futures also climbed 6.69% to close at $102.48 per barrel. The producer price index (PPI) for August released the previous day also slightly beat market expectations.
The U.S. Treasury's buyback size, implemented to stabilize long-term yields, also came in below market expectations, adding upward pressure on rates. If the Treasury increases its purchases of long-term Government Bonds, demand for long bonds rises, pushing up Government Bonds prices and lowering yields. The Treasury said it would buy $600 million in Government Bonds, but the market had expected a larger $800 million to $1 billion buyback. The actual purchase totaled $518.7 million.
The probability that the Federal Open Market Committee (FOMC) will raise the benchmark rate in September has also risen sharply. According to CME FedWatch, the probability of a September rate hike stood at 69.4%, more than 8 percentage points higher than the previous day. The market is factoring in at least one hike by year-end, and possibly two depending on conditions. However, the August consumer price index (CPI), to be released on the 11th local time, is expected to be a key variable for the September decision.
◇ Oil and supply-demand factors stoking prolonged high rates
Despite President Trump's early-end-to-war remarks, market concerns over the Middle East situation are deepening. In particular, Trump said on the 9th that "as soon as the (November midterm) elections end, the war will end and oil prices will plunge," but the mood inside the administration is quite different. Reports that Vice President J.D. Vance and Secretary of State Marco Rubio met Trump to discuss the possibility that tensions with Iran could last through the end of the term have heightened market worries about the Middle East.
Kim Il-hyeok, an analyst at KB Securities, said, "News of discussions that contradict Trump's comment that Iran can no longer hold out and reports that preparations are being made for a protracted war have led the market to reassess the Middle East, and the rise in oil prices is accelerating."
Some suggest that AI corporations such as OpenAI and Anthropic, which are preparing for initial public offerings (IPOs), may issue public corporate bonds. According to the Financial Times (FT), the two companies are in talks with global investment banks (IBs) such as Morgan Stanley and credit rating agencies to obtain ratings for bond issuance. Kim Jun-su, an analyst at NH Investment & Securities, said, "This is seen as an attempt to bolster capital through large-scale IPOs, replace short-term high-rate debt with long-term public bonds, and secure funding for AI infrastructure investment."
As ultra-long-dated corporate bond issuance by big tech corporations in the United States has emerged as an alternative to U.S. long-term Government Bonds and dampened demand, there are concerns that bond sales by the two companies could further raise supply pressure. According to Reuters, hyperscalers have issued about $220 billion in corporate bonds over the past year. Although the specific size of the two companies' offerings has not been set, continued growth in bond supply driven by expanded AI infrastructure investment could burden the market.
However, some note that despite high growth potential, AI corporations that have not yet generated sufficient free cash flow (FCF) may find it difficult to obtain investment-grade ratings. On the other hand, given that SpaceX moved to issue $25 billion in bonds just days after its IPO, there is also an outlook that AI corporations could enter the corporate bond market. SpaceX later received investment-grade ratings from the three major credit rating agencies in June. However, the bonds were quickly sold off after issuance, raising market concerns about credit risk.
The market sees a high possibility that the U.S. 10-year Government Bonds yield will reach 5%. Patrick Gable, head of Americas research at ING, said in an interview with Bloomberg, "It looks inevitable that the 10-year U.S. Government Bonds yield will reach 5%."
◇ If it tops 5%, downward pressure on stocks… semiconductor shares solid
Prolonged high rates are expected to exert downward pressure on Korea's stock market. When rates rise, corporations' financing expense and the discount rate for equities increase, burdening the valuations of growth stocks that reflect future growth. Byun Jun-ho, an analyst at IBK Securities, saw "the issues of breaking the previous peak and topping 5% as likely to have a psychologically negative impact on the market."
However, there is a view that semiconductor shares are likely to remain relatively resilient. Kang Dae-seung, an analyst at SK Securities, said, "As can be seen from capital expenditure (CAPEX) plans by major U.S. IT corporations and graphic processing unit (GPU) rental prices, demand for artificial intelligence (AI) remains high," adding, "Given the current high uncertainty over Iran and rates, semiconductors are likely to show relative strength as the attractiveness of other institutional sectors declines."