SEOUL: South Korea’s bond is set to extend this year’s rout as a semiconductor boom supercharges the nation’s economic growth and adds to inflationary pressures, analysts say.
Citigroup Inc now expects four quarter-point interest-rate increases over the next year versus two previously.
iM Securities sees the three-year yield rising to 4%, the highest since November 2023, while Shinyoung Securities projects it to approach 3.8%.
The bond selloff suggests investors no longer see current interest-rate levels as restrictive enough to cool an economy firing on multiple cylinders.
The artificial intelligence (AI)-driven investment boom in chips is also sparking inflationary concerns in Taiwan and Japan.
The rise in South Korea’s three-year yield by more than 86 basis points (bps) from this year’s low also mirrors a broader global move, as markets increasingly bake in persistent inflation and the prospect of higher-for-longer rates.
“Markets are increasingly building a narrative that South Korea’s growth next year could exceed the mid-2% range,” said Myoungsil Kim, a fixed-income analyst at iM Securities, compared with the Bank of Korea’s (BoK) previous 1.8% forecast.
She added that such a move would pose a key risk to the bond market.
The policy-sensitive three-year yield rose as high as 3.77% this week, the highest since November 2023.
Traders are pricing in almost 120 bps of tightening from the Bank of Korea over the next year in won interest-rate swaps, according to Bloomberg-compiled data.
That surge has brought the market to a critical juncture ahead of the BoK’s May 28 policy decision.
Yields have also climbed on a sharp shift in policy expectations following the appointment of Governor Shin Hyun Song.
Shin is viewed as hawkish after emphasising upside inflation risks over growth concerns, signalling a greater willingness to keep rates higher to contain price pressures.
The BoK held its benchmark rate steady at 2.5% at its April meeting.
The spread between the three-year yield and the benchmark interest rate has widened to more than 120 bps, the largest gap since the pandemic-era rate-rise cycle in 2022.
Some strategists, however, argue yields may be overstretched.
Goldman Sachs Group Inc strategists, including Irene Choi say market pricing of four or more hikes is excessive and expect yields to stabilise if geopolitical tensions ease.
Still, the rise in yields may reflect more than an overshoot in rate expectations.
Analysts point to a semiconductor upcycle and expanding AI investment among factors reshaping South Korea’s growth outlook and reinforcing a higher-rate environment.
“An exponential increase in AI investment spending is driving an innovation shock to both nominal and real exports in South Korea,” Bumki Son, an economist at Barclays Plc wrote in a note last Thursday.
He compared the growth sparked by the semiconductor and AI boom “to discovering new oil reserves” in terms of boosting gross domestic product (GDP).
Stronger semiconductor shipments are boosting corporate tax receipts, with Citigroup estimating about 20 trillion won (US$13.5bil) in additional revenue in the second half of financial year 2026 and 120 trillion won in 2027.
That supports higher government spending, adding further upside risks to growth and putting a floor under bond yields.
Citigroup last week raised its 2026 and 2027 GDP growth forecasts to 3.0% and 2.8% from 2.9% and 2.4%, respectively, while Barclays expects growth of about 2.6% this year, above the BoK’s February forecast of 2.0%.
“It’s still too early to call a peak,” in bond yields, said Cho Yong-gu, a fixed-income analyst at Shinyoung Securities.
“Second-round effects from higher oil prices, strong growth and the likelihood of additional fiscal spending from tax windfalls are all negative for the bond market.” — Bloomberg
