Surging U.S. Treasury yields… concerns mount over a ‘KOSPI decline’ even as retail investors hold on

Middle East war fallout lifts U.S. medium- to long-term Treasury yields

Korea Treasury yields also jump

U.S. Treasury yields are surging in the wake of the war between the United States and Iran, driven by a stronger risk-off mood. In particular, fears of a resurgence in inflation are sweeping markets, pushing up long-term yields as well. Korea Treasury yields have also been rising day after day, prompting views that this could lead to a decline in the KOSPI.

According to the financial investment industry on the 15th, the yield on the 2-year U.S. Treasury note stood at 3.734% on the 13th (local time), the highest level in about seven months since Aug. 21 last year (3.792%). The 10-year yield also recorded 4.285%, up 29.5bp from late February. The 30-year yield rose 29.5bp to 4.908%, closing in on 5%.

The broad rise in U.S. Treasury yields is seen as reflecting a spike in international oil prices amid recent clashes with Iran and fading expectations for Federal Reserve rate cuts.

While U.S. Treasury yields rose across the curve, gains were relatively smaller in short-term yields of one year or less. The 1-year yield, for instance, climbed 16.7bp to 3.644% on the 13th from 3.477% at the end of February.

This points to a ‘bear steepening’ move, in which medium- and long-term yields rise faster than short-term yields. The market is beginning to price in structural issues—such as long-term fiscal soundness—more heavily than monetary policy. It also reflects concerns that escalating Middle East tensions and higher energy prices could rekindle inflation.

Amid such inflation uncertainty, the possibility that the war could widen the U.S. fiscal deficit and increase Treasury issuance has further raised the risk of holding long-duration bonds. The long end was pushed higher as investors demanded greater compensation for that risk, reflected in a higher ‘term premium.’

U.S. President Donald Trump is pressuring the Federal Reserve to cut rates immediately. However, markets are placing greater weight on the likelihood that long-term Treasury yields will keep rising as long as the war with Iran continues.

Korea Treasury yields also jumped as oil prices surged on heightened Middle East tensions. According to the Korea Financial Investment Association, the 3-year Korea Treasury yield reached 3.338% as of the 13th, the highest level in one year and nine months since June 2024. It was 3.041% as recently as the 27th of last month. But it began rising in March, surging by 0.297% points in just two weeks.

The 5-year Korea Treasury yield also rose by 0.278% points over the same period to 3.556% on the 13th. The 10-year yield climbed by 0.255% points to 3.701%, as long-term yields surged in tandem. With Korea Treasury yields rising day after day, the outstanding balance of bond lending transactions also surpassed 200 trillion won for the first time ever on the 6th. It remained at a similar level on the 13th at 195 trillion won.

Markets are also noting that if volatility in the government bond market increases, foreign investors may reduce their allocation to risk assets, lowering their weight in Korean equities—potentially pushing down the KOSPI, which has been holding up on retail buying despite a series of negative factors. In particular, higher long-term yields are expected to hurt overall corporate profitability and weigh on the valuation of growth stocks—such as in the tech and biotech sectors—where a larger share of value is tied to future earnings.

Park Subin, Hankyung.com reporter waterbean@hankyung.com