Global Long-Term Yield Surge Sends KOSPI on a Wild Ride

Long-term government bond yields have recently experienced a significant surge, impacting South Korean stocks. The KOSPI, a key South Korean stock index, experienced sharp fluctuations, moving from a steep decline to a strong rebound within a single day. This volatility was triggered by rising U.S. fiscal deficits, Treasury issuance, heavy corporate bond issuance by tech companies for AI investments, and increasing Japanese yields. The U.S. 30-year Treasury yield peaked at 5.337% on August 19, its highest level since 2007.

South Korean long-term yields followed the U.S. trend, peaking at 4.787% on August 18 and slightly falling to 4.719% on August 19. The surge in long-term yields stems from growing fiscal burdens, increased government bond supply, and substantial corporate bond issuance by tech firms to finance AI projects. If demand from long-term investors fails to match the rising supply, issuers may need to offer higher yields to attract buyers.

The market is also witnessing a bear-steepening trend, where medium- and long-term yields rise faster than short-term rates. This suggests investors are placing more emphasis on structural factors like fiscal sustainability, Treasury supply, and the term premium than on near-term monetary policy. If long-term yields are driven primarily by market supply and fiscal concerns rather than central bank policy, rate cuts might have a less significant impact on the real economy and financial markets.

Higher U.S. long-term yields negatively affect South Korean stocks, particularly growth stocks, which make up a significant portion of the market. Increased Treasury yields boost the appeal of safe-haven assets and raise the discount rate applied to future corporate earnings, potentially undermining growth-stock valuations. Japanese long-term yields also pose additional pressure on global bond markets.

Japan's 10-year and 30-year bond yields reached around 2.96% and 4.155% respectively on August 18, the highest in about 30 years.

Despite these concerns, the KOSPI rebounded sharply on August 20. The index rose 6.34%, closing at 6,881.69 after a buy-sidecar was activated. Foreign investors and institutions were net buyers, while retail investors were net sellers. The Treasury's expansion of its long-term bond buyback program helped alleviate concerns about the recent global yield surge. SK hynix's announcement of a substantial share buyback also boosted investor sentiment, with the company's shares rising 12.73%.

However, the one-day rebound does not mean the risks from rising global yields have vanished. The U.S. fiscal deficit, Treasury supply, corporate bond issuance by tech firms for AI investments, and rising Japanese long-term yields, along with potential capital repatriation, could still put upward pressure on long-term yields. Conversely, yields may stabilize if the recent Treasury issuance is gradually absorbed and geopolitical tensions ease.

The outlook for South Korean stocks will depend on both corporate earnings and whether global long-term yields, led by U.S. Treasurys, continue to rise or stabilize. The KOSPI's sharp rebound on August 20 reflected a temporary easing of concerns over higher yields and renewed buying of semiconductor stocks. Despite this, market volatility is likely to persist as structural pressures on long-term yields remain.