Kevin Warsh, a candidate for the next Federal Reserve chair, testifies at a Senate Banking Committee confirmation hearing at the U.S. Capitol in Washington, D.C., on the 21st of last month. Reuters-Yonhap
U.S. Treasury yields are climbing at a rapid pace. On the 15th, the yield on the 10-year U.S. Treasury note rose to 4.59%, breaching the psychological threshold of 4.5%. The 30-year U.S. Treasury yield hit 5.12%, the highest level in 19 years. The surge reflects mounting inflation concerns driven by elevated oil prices as the blockade of the Strait of Hormuz drags on. Markets expect Kevin Warsh, the incoming chair of the U.S. Federal Reserve, to find it difficult to cut the benchmark rate within the year amid inflationary pressure.
Global inflation worries have also driven a sharp rise in sovereign bond yields in major economies. Japan’s 10-year government bond yield reached 2.50%, the highest in 29 years, while the U.K.’s 30-year gilt yield hit 5.77%, the highest in 28 years. Korea’s three-year government bond yield also jumped 0.81 percentage points from the previous trading day to 3.76%. The gap with the Bank of Korea’s benchmark rate (2.50%) widened to 1.26 percentage points, the largest spread in three years and seven months since the Legoland crisis.
If rising government bond yields trigger a chain reaction of surges in market rates, the consequences could detonate latent risks in the real economy and capital markets. Households that took on mortgages during the low-rate era or piled into “yeongkkeul” (scraping every penny) borrowing to chase the recent stock rally face an inevitable increase in interest burdens. According to the Bank of Korea, even a 0.25 percentage point rise in lending rates would add 3.2 trillion won annually to households’ interest payments. Meanwhile, the won-denominated loan delinquency rate (one month or longer) for small and medium-sized enterprises at Korea’s five major banks stood at 0.65% as of April, eight times the 0.08% rate for large corporations. On top of this, the balance of money market deposit accounts (MMDA), where idle cash in the market piles up, has exceeded 157 trillion won, signaling an intensifying “K-shaped polarization” in the capital markets.
The reality is grim, with high interest rates, high inflation and capital market polarization converging at once. In such conditions, the “weak links” — low-income households, the self-employed and small and medium-sized enterprises — are the first to crumble. Financial authorities must put in place pre-emptive monitoring and tailored support measures to prevent default risks among marginal borrowers from spilling over into broader instability across the financial system, while sorting out non-viable marginal companies from those that can be saved. As global rates rise, it is time to move quickly to build pre-emptive safeguards so that the real economy is not shaken.