Korea's 30-year government bond yield has climbed to its highest level in about two and a half years, as inflation concerns mount amid the Middle East conflict. Long-term bond yields are surging in major markets such as the United States and the United Kingdom, and Korean Treasury bond yields are rising in tandem. Fiscal experts warn that "an overly strong commitment to expansionary fiscal policy by the government could send the wrong signal to the market."
According to the Korea Financial Investment Association on the 6th, the 30-year government bond yield closed at 3.844%, up 0.029 percentage point from the previous day. This marks the highest level in two years and six months since November 2023.
Long-term bond yields have been surging in global financial markets recently. The U.K.'s 30-year gilt yield closed at 5.742% on the 5th (local time), reaching its highest level in 28 years since 1998, and the U.S. 30-year Treasury yield closed at 5.025% on the 4th, crossing the psychological resistance level of 5% for the first time in about a year. The Financial Times (FT) analyzed that "bond yields are rising as high sovereign debt in advanced economies converges with inflation concerns stemming from the Iran war and expectations of delayed monetary easing." In particular, market participants in the U.S. believe that balance sheet reduction policies advocated by Kevin Warsh, a candidate to be the next Federal Reserve chair, will drive down long-term bond prices (pushing yields higher). The logic is that bond demand will weaken as the Fed stops buying bonds in the market.
The prevailing view in the market is that rate hikes are inevitable in Korea as well. This is because the impact of the Middle East war is likely to begin affecting consumer prices in earnest from May. The Bank of Korea has also effectively confirmed a rate hike in the second half of this year. "Given the significant uncertainty surrounding the war, it is difficult to dispute the approach of setting monetary policy with a focus on prices," a government official said.
The problem is that strong expansionary messages are pouring out regarding the government's fiscal policy, which directly affects bond yields. On the 5th, President Lee Jae-myung shared on his X (formerly Twitter) account a post titled "To the Strange People Who Sing the Austerity Song at Every Turn," which linked to an article from the Naramsalim Research Institute analyzing the International Monetary Fund (IMF) Fiscal Monitor. The institute said Korea's net debt ratio forecast for this year is 10.3%, far below the G20 average of 89.6%, adding that the country has "substantial fiscal capacity." Koo Yun-cheol, Deputy Prime Minister and Minister of Economy and Finance, also emphasized on Facebook the same day that "the IMF Fiscal Monitor defines Korea as a country with historically strong fiscal health and refers to Korea's fiscal expansion as a policy choice utilizing that capacity."
Assessments from the market and academia are divided. As a non-reserve-currency country, Korea has largely maintained the principle of fiscal soundness, on the grounds that when expansionary fiscal policy pushes Treasury bond yields higher, market interest rates also rise, which can dampen investment and consumption by businesses and households. "Based on national debt (D1) or general government debt (D2), the situation may still be considered manageable, but concerns can arise when looking at public sector debt (D3), which includes debt from state-owned enterprises," said Kim Jung-sik, a professor of economics at Yonsei University.
On the other hand, Hong Choon-wook, CEO of Prism Investment Advisory, said, "Korea's finances are in very sound shape," adding that "we need to prepare for future pension and health insurance burdens, but there is no need to excessively highlight a current fiscal crisis."
Some argue that attention should be paid not to the size of the debt but to the pace of its increase. By IMF general government debt standards, Korea's debt ratio rose 14.7 percentage points, from 39.7% in 2019 to 54.4% in 2026, exceeding the average G20 increase of 9.5 percentage points. The net debt ratio also rose 11.8 percentage points from -1.5% to 10.3% over the same period, a larger increase than the G20 average of 9.8 percentage points. Korea is one of only two member countries, along with Turkey, among the 38 members of the Organization for Economic Cooperation and Development (OECD) that have not adopted fiscal rules. This means there is virtually no institutional safeguard to control the pace of debt growth.
"Given Korea's demographic structure, fiscal deficits are bound to increase, so we need to take a medium- to long-term perspective," said Yang Jun-seok, a professor of economics at the Catholic University of Korea. "We must immediately begin structural reforms to respond to demographic changes, such as extending the retirement age."
