Korea’s AI Impact Sparks Pressure Across Government Bond Market

bc6ieiac3jigd(hw833w0{ku_media_dl_1.png Bloomberg, Bank of Korea

Article content

(Bloomberg) — Investor fervor for artificial intelligence that has driven South Korea’s stock market to the top of global rankings is taking a toll on another market: government bonds.

Article content

The nation’s government bonds have lost 7.5% this year in local-currency terms, the worst performance among 44 markets tracked by Bloomberg. The benchmark three-year yield rose to about 3.9% Friday, its highest level since 2023. 

Article content

Article content

Article content

At the heart of the rout lies a growth story too strong for bonds to bear. A surge in AI investment and semiconductor demand has reignited Korea’s economy, lifted prices, and fueled bets the central bank will need to raise rates to rein in momentum.

Article content

Article content

Korea isn’t alone in facing bond pressures, as strong government spending and higher energy costs from the Iran war heighten inflationary pressures worldwide. But the squeeze is sharper in Asia’s semiconductor hub, where Samsung Electronics Co. and SK Hynix Inc. have drawn investor capital toward equities, as well as greater volatility. Inflation had already been stoked by high apartment prices, while the won’s tumble drives fears of rising import costs and triggers further Bank of Korea rate hikes.  

Article content

“It’s a vicious cycle feeding on itself,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities, referring to bond market conditions. “There doesn’t seem to be any clear way out at the moment.”

Article content

Yields are climbing in anticipation of the BOK’s upcoming tightening cycle. The swaps market is pricing in at least three hikes this year, taking the policy rate to 3.25% from 2.5%. 

Article content

Article content

Cho expects the nation’s three- and 10-year yields to reach up to 4% and 4.4% this year.

Article content

The chip sector’s boom and the Kospi’s roughly 80% jump have helped to lift the BOK’s growth forecast for this year to 2.6% from 2%. Inflation adds to the case for rate increases, with the 2.5% core inflation reading in May showing pressures spreading beyond energy. The data supports the hawkish tilt under new BOK Governor Shin Hyun Song. 

Article content

After the latest policy meeting, which struck a distinctly hawkish tone, “one can’t help but wonder whether the bond market has simply been abandoned,” Cho said.

Article content

The government last week pledged to monitor the bond market and respond promptly to excessive volatility, officials from the finance ministry and BOK said in a statement.

Article content

Supply Risks

Article content

Fiscal spending and the additional bond supply it may require will be closely watched as tax coffers swell from chip sales under the current left-leaning government. Officials insisted in March there would be no extra issuance to fund a supplementary budget, but talk of yet another extra budget has left traders on edge.