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(Bloomberg) — South Korea’s 10-year bond yield rose above 4% for the first time since late 2023, as an oil shock tied to the Iran conflict leads traders to expect bigger interest rate hikes.
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The repricing is also gathering pace as an AI-driven memory-chip upcycle underpins growth, prompting major brokerages to revise their Bank of Korea policy outlooks. Goldman Sachs Group Inc. now forecasts two quarter-point hikes this year, versus none previously, while Hana Securities Co. sees one increase, up from zero. Nomura Holdings Inc. expects the BOK turning more hawkish in its dot plot while still expecting hold through next year.
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“South Korea is seeing inflation mechanically pushed higher by rising oil prices, while at the same time growth forecasts are being revised upward on the semiconductor supercycle,” said Park Junwoo, fixed-income strategist Hana Securities.
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The shift upends months of consensus for steady policy this year. Investors are increasingly concerned that the AI-driven boom will sustain stronger-than-expected growth — already evident in the first-quarter data — while elevated energy prices push inflation higher. South Korea’s heavy reliance on imported oil leaves it exposed to higher oil prices.
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The 10-year yield climbed 11 basis points to 4.06% on Tuesday, according to data from the Korea Financial Investment Association. Korean bonds have delivered a 6.4% loss for dollar-based investors on a hedged basis this year, among the worst performance in emerging markets.
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Tuesday’s move came as local equities swung sharply after a comment by a policymaker on citizen dividend from the AI boom sparked a selloff. Still, the Kospi Index has surged more than 81% this year, fueled by the AI-driven global tech rally.
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The shift also coincides with the departure of Shin Sung Hwan, prominent dove on the BOK board, leaving the panel more hawkish ahead of its May 28 meeting, according to Bloomberg Economics.
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Accelerating headline inflation gives the BOK stronger reason to sound hawkish as it matters for inflation expectations and households’ perceptions of inflation, Nomura economists including Jeong Woo Park wrote in a note.
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—With assistance from Marcus Wong.
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