US Treasury Yield Surge Pauses as Relative Safe-Haven Demand Picks Up

South Korean government bond yields also fall

Buying fueled by concerns over France’s fiscal deterioration

Weaker expectations for further Fed rate hikes also weigh

The rapid rise in US Treasury yields is easing. Concerns over France’s deteriorating fiscal position have spurred demand for safe-haven assets, while expectations for another Federal Reserve rate increase have weakened. As US Treasury yields fell, South Korean government bond yields declined as well.

According to Investing.com on October 2, the yield on the two-year US Treasury note, which had risen as high as 4.93% intraday the previous day, traded at 4.78% as of 4 p.m. The 10-year US Treasury yield, which had climbed to 5.34% intraday a day earlier, also fell to 5.24% by 4 p.m. Demand for US and German government bonds increased as concerns over France’s fiscal deterioration strengthened appetite for safer assets.

Cho Yong-gu, a research fellow at Shinyoung Securities, said France’s fiscal vulnerability was emerging as the weakest link in the euro zone, which has been left out of the artificial intelligence cycle during a prolonged period of high global interest rates. That, he added, paradoxically led investors to treat US Treasuries as a relatively safe asset.

Weaker expectations for further Fed rate hikes also affected yields. New York Fed President John Williams said additional action after the September increase was not urgent. Fed Vice Chair Philip Jefferson also said a decision on another rate hike could take more time, signaling an increase in December rather than October.

As US Treasury yields declined, South Korean government bond yields moved lower as well. The yield on South Korea’s three-year government bond fell 0.073 percentage point from the previous trading day to 3.937% on October 2, dropping below 4% for the first time in 13 trading sessions. The 10-year yield also fell 0.071 percentage point to 4.365%. Analysts say the correlation between South Korean and US bond yields has increased as South Korea, along with the US, is viewed as a beneficiary of expanding AI investment.

The government’s strong commitment to reducing government bond supply also contributed to the decline. The Ministry of Economy and Finance said the previous day that it would cut planned October government bond issuance by 5 trillion won ($3.62 billion) from its original plan using excess tax revenue. It set competitive auction issuance at 12 trillion won ($8.68 billion), down 4 trillion won ($2.89 billion) from the previous month.

Lee Hyoung-il, vice finance minister and acting finance minister, held a market review meeting on October 2 and said the government would closely monitor the government bond market and consider a further reduction in issuance if needed. Investors expect easing supply pressure to help stabilize yields.

Shim Sung-mi, Hankyung.com reporter smshim@hankyung.com