South Korean government bond yields rise sharply amid concerns over international oil prices and fiscal expansion, causing volatility in the bond market

On the 12th, the Seoul bond market saw a sharp overall increase in government bond yields. This was due to a surge in international oil prices leading to increased pressure on inflation and monetary policy, coupled with the possibility that the government may expand fiscal spending, resulting in a generally weak bond price trend.

That day, the yield on 3-year government bonds rose by 7.6 basis points (1bp=0.01 percentage points) from the previous trading day, closing at an annual interest rate of 3.674%. Based on the closing price, this was the highest level this year. The 10-year yield increased by 10.6 basis points to an annual rate of 4.056%, the 5-year yield rose by 9.3 basis points to 3.870% annually, and the 2-year yield increased by 6.2 basis points to 3.547% annually. The gains in ultra-long-term bonds were also significant. The 20-year yield rose by 12.1 basis points to 4.060% annually, while the 30-year and 50-year yields increased by 12.1 and 11.8 basis points respectively, reaching 3.971% and 3.821% annually. Notably, the 10-year and 20-year yields experienced double-digit increases, highlighting the pronounced weakness in the long-term segment.

The primary background for the rise in bond yields is believed to be the increase in oil prices caused by instability in the Middle East. On the 11th local time, U.S. President Donald Trump mentioned that the ceasefire agreement with Iran was barely holding, causing international oil prices to climb again. The Brent crude futures for July delivery closed at $104.21 per barrel, up 2.9% from the previous day; the West Texas Intermediate (WTI) crude futures for June delivery closed at $98.07 per barrel, up 2.8%. The rise in oil prices may simultaneously boost corporate production costs and consumer prices, making the market more sensitive to the persistence of high interest rates than to rate declines.

Concerns over energy supply disruptions also heightened market unease. Amin Nasser, CEO of Saudi Aramco, stated that even if the Strait of Hormuz were to reopen immediately, supply and demand balance might take months to restore. He even predicted that if the blockade continued for several more weeks, normalization might be difficult by 2027. NH Investment & Securities researcher Kang Seung-won (phonetic) analyzed that even if the U.S. and Iran negotiate, the market strongly believes that restoring oil prices to previous levels is already too late, and the alertness regarding the U.S. inflation data scheduled for release that day also affected the upward movement of interest rates. Despite foreign investors net buying 2,213 lots of 3-year government bond futures and 871 lots of 10-year government bond futures, the overall market weakness could not be reversed.

Domestic factors also pushed long-term interest rates higher. President Lee Jae-myung emphasized during a State Council meeting at Cheong Wa Dae on the 12th that active fiscal management would provide substantial momentum for the people’s economy, making the market more aware of the possibility of additional budget allocations in the second half of the year. Concerns about increased government bond issuance due to expanded fiscal spending intensified, especially exerting more direct upward pressure on long-term bond yields. Industry experts described the day’s market movements as a so-called “taper tantrum,” a situation where interest rates rise sharply while prices plummet simultaneously. This trend may continue for some time, centered on long-term interest rates, depending on the progress of international oil prices, U.S. inflation indicators, and domestic discussions on additional fiscal policies.