Oil price shocks combined with AI dividends, South Korea's 10-year government bond yield breaks 4%, market rate hike expectations heat up

South Korea’s benchmark government bond yields break through a key psychological level, and the bond market is undergoing significant re-pricing.

According to Bloomberg, the yield on South Korea’s 10-year government bonds rose 11 basis points to 4.06%, marking the first time since the end of 2023 that it has broken above 4%. The dual drivers behind this move are: the oil-price shock triggered by the conflict in the Middle East, which raises inflation expectations, and the growth supported by the upward cycle of AI chips, which gives the central bank room to tighten policy—together reinforcing market expectations for rate hikes.

Goldman Sachs has therefore raised its policy forecast for the Bank of Korea this year from “no rate hikes” to “two 25-basis-point rate hikes”; Hana Securities has also raised its outlook from “none” to “one.” Nomura expects the Bank of Korea to release more hawkish signals in the interest-rate dot plot.

Oil Price Shock and Semiconductor Cycle Create a Dual Boost

The simultaneous upward revision of South Korea’s inflation and growth expectations is becoming the core logic behind this round of government bond yield re-pricing.

South Korea is highly dependent on imported oil, making it especially vulnerable to the oil-price volatility caused by this round of conflict in the Middle East. The rise in energy costs transmits to inflation relatively directly; coupled with the strong growth momentum that has already emerged in Q1, market judgments that the space for policy easing is narrowing have been further reinforced.

At the same time, the AI-driven global tech rally has boosted demand for memory chips, providing additional growth support for the South Korean economy. Since the beginning of the year, South Korea’s composite stock price index (Kospi) has gained more than 81% cumulatively.

Hana Securities fixed income strategist Park Junwoo said, “South Korea is facing pressure from the mechanical rise in inflation caused by higher oil prices, and at the same time, the semiconductor super cycle is also pushing up revisions to growth expectations. These two forces are stacking in the same direction.”

Hawkish Forces Strengthen, and the May Meeting Becomes a Key Turning Point

Changes in the composition of the Bank of Korea’s committee provide structural support for adjustments to the policy path.

With the departure of the most dovish member, Shin Sung Hwan, Bloomberg Economic Research analysis indicates that the committee’s overall stance has become clearly more hawkish. In a research report, Nomura Securities economist Jeong Woo Park and others pointed out that accelerating overall inflation gives the Bank of Korea more grounds to issue hawkish signals, “because it directly affects inflation expectations and residents’ perception of prices.”

Nomura expects the Bank of Korea to adopt a more hawkish posture in the interest-rate dot plot, but it still forecasts that interest rates will remain unchanged before next year; Goldman Sachs goes further, expecting two rate hikes within the year. This divergence itself shows that the market’s assessment of the Bank of Korea’s policy path has not yet converged, and the meeting on May 28 will be an important window for clarifying the outlook.

Bond Market Under Pressure as Investors Absorb Policy Re-Pricing

The rapid rise in yields has already left clear traces in South Korea’s bond market.

On a USD-hedged basis, South Korea’s government bonds have recorded a cumulative loss of 6.4% this year, underperforming among emerging market bonds. Tuesday’s sell-off coincided with sharp fluctuations in the local stock market—comments by a policy official on AI dividend distribution triggered a brief pullback in the stock market, further amplifying the sentiment volatility in the market that day.

Geopolitical risks, inflation rising, growth coming in above expectations, and changes in the central bank committee composition—these multiple factors are jointly dismantling the market’s previously formed consensus of “no policy change throughout the year.” For fixed income investors, uncertainty about South Korea’s interest-rate path has increased significantly compared with a few months earlier.

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