(EDITORIAL from The Korea Herald on Aug. 21)

Expensive Debt Threatens South Korea as Global Bond Yields Soar

For years, low interest rates made borrowing appear harmless. However, soaring global bond yields are teaching a costly lesson. Major economies saw long-term government bond yields spike, with the US 30-year Treasury yield surpassing 5.33 percent, its highest level since 2007. Japan's 10-year yield reached a three-decade high of 2.95 percent, while yields in France, Germany, the UK, and South Korea hit multi-year or record peaks.

Although short-term yields in the US remain relatively stable due to expectations of rate cuts, the rise in long-term yields is driven by several factors.

Investors demand higher compensation for holding long-term bonds due to expanding sovereign borrowing, unpredictable inflation, and a surge in global bond supply. In the US, federal debt is nearing $40 trillion, and annual interest servicing exceeds $1 trillion, rivaling the defense budget. Japan is pursuing expansionary spending despite a debt burden exceeding 250 percent of its GDP. European governments face heavy funding needs that further increase global borrowing costs.

The rise of artificial intelligence (AI) has created a new class of borrowers. Tech giants like Amazon, Alphabet, Microsoft, Meta, and Oracle are heavily tapping credit markets to finance data centers and chip purchases. These five hyperscalers are set to issue roughly $250 billion in bonds this year, doubling last year's figure.

Their total corporate issuance is expected to grow even more in 2027. However, the AI-driven tech boom competes with government bonds and top-rated corporate debt for investors' attention. When bond supply and inflation uncertainty rise together, borrowing costs across the market can climb.

Energy-related factors add another layer of complexity. Tensions near the Strait of Hormuz have pushed oil prices higher, reigniting broad price pressures. Long-dated paper is sensitive to inflation risks, and even if central banks lower benchmark rates, high long-term yields will keep mortgages, corporate debt, and private consumer loans expensive.

South Korea, with its export-dependent economy, is particularly vulnerable to this global shift. Its domestic long-term rates closely track major global markets. The sharp fluctuations in the benchmark Kospi index this week demonstrate how quickly bond market anxiety can spread to equities. South Korea's household balance sheet is fragile, and the record-high household credit of 2,019.8 trillion won ($1.45 trillion) at the end of June, up 25.9 trillion won in the second quarter, signals increasing pressure on domestic spending.

This surge in capital costs also threatens South Korea's chip-export model. Expensive debt could curb hyperscaler infrastructure spending that drives demand for advanced memory components, potentially undermining a key driver of export growth. Policymakers must address this strain with more than temporary liquidity injections or relaxed credit caps.

They must tackle key issues directly. Fiscal policy should preserve market confidence by setting clear spending boundaries, especially as tax revenues benefit from temporary chip windfalls. Monetary policy must anchor inflation expectations and provide targeted credit protections to vulnerable borrowers. The markets have shattered the assumption that cheap capital will remain permanent. For South Korea, adjusting early is far better than waiting until high yields become the new norm.