Long-term yields in Korea's bond market are rising rapidly as the government publicly emphasizes the need for expansionary fiscal policy. Inflation concerns stemming from the Middle East war, surging long-term yields in major economies including the United States and the United Kingdom, and the possibility of a Bank of Korea rate hike in the second half are all converging at once. Concerns are emerging that the more the government touts its fiscal capacity to justify expansionary policy, the more the market will price in the likelihood of increased government bond issuance, intensifying upward pressure on long-term yields.
According to the Korea Financial Investment Association on the 6th, the 30-year government bond yield closed at 3.844%, up 0.029 percentage points from the previous day (the 5th). This is the highest level in 30 months since November 2023. A jump in long-term government bond yields can affect not only the government's interest burden but also private borrowing costs such as corporate bond and loan rates.
Behind the bond market's sensitive reaction are strong policy signals surrounding expansionary fiscal policy. President Lee Jae-myung posted on his X (formerly Twitter) account on the 5th a message titled "To those strange people who constantly sing the song of austerity," sharing an article by the Naramsalim Research Institute analyzing the International Monetary Fund (IMF) Fiscal Monitor. The institute said Korea's net debt ratio forecast for this year stands at 10.3%, far below the Group of 20 (G20) average of 89.6%, adding that Korea "has ample fiscal capacity."
Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol also emphasized on Facebook the same day that "the IMF Fiscal Monitor defines Korea as a historically fiscally sound country and refers to Korea's fiscal expansion as a policy choice utilizing its capacity."
The problem is that such arguments for fiscal expansion are emerging at a time when both inflation and interest rates are unstable. With international oil prices and logistics costs shaken by the Middle East war, the likelihood that the shock will be reflected in consumer prices starting in May has grown. The Bank of Korea has also effectively confirmed a rate hike in the second half. "The uncertainty surrounding the war is so great that it is difficult to dispute setting monetary policy with a focus on inflation," a government official said.
Overseas bond markets are also pushing up domestic rates. The UK's 30-year government bond yield closed at 5.742% on the 5th (local time), the highest level in 28 years since 1998. The US 30-year government bond yield closed at 5.025% on the 4th, crossing the psychological resistance line of 5% again for the first time in about a year. The Financial Times (FT) analyzed that "government bond yields are rising as high sovereign debt in advanced economies combines with inflation concerns stemming from the Iran war and prospects of delayed monetary easing."
In particular, in the United States, there is speculation that the balance sheet reduction policy of Kevin Warsh, the next Federal Reserve chair candidate, will trigger a decline in long-term bond prices, or a rise in yields. The logic is that if the Fed no longer purchases bonds in the market, bond demand may weaken.
Experts point out that Korea's status as a non-reserve currency country must be taken into consideration. If government bond yields rise due to expansionary fiscal policy, market interest rates will follow, potentially dampening corporate and household investment and consumption. "By the standards of national debt (D1) or general government debt (D2), things can still be considered fine, but concerns may arise when viewed through the lens of public sector debt (D3), which includes state-owned enterprise debt," Kim Jung-sik, professor of economics at Yonsei University, said. Fiscal experts also warn that "if the government's will to expand fiscal policy is too strong, it may send wrong signals to the market."
On the other hand, there is also a view that Korea's fiscal capacity should be utilized more actively. "Korea's fiscal position is extremely sound," Hong Choon-wook, CEO of Prism Investment Advisory, said. "While we need to prepare for future pension and health insurance burdens, there is no need to excessively highlight a current fiscal crisis."
However, counterarguments remain that attention should be paid to the pace of debt growth rather than the absolute level. Based on the IMF's general government debt, Korea's debt ratio jumped 14.7 percentage points from 39.7% in 2019 to 54.4% in 2026. This exceeds the G20 average 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, surpassing the G20 average increase of 9.8 percentage points.
The lack of institutional safeguards is also a burden. Korea is one of only two countries, along with Türkiye, among the 38 member states of the Organisation for Economic Co-operation and Development (OECD) that has not adopted fiscal rules. This effectively means there is no formal mechanism to control the pace of spending expansion and debt growth.
"Korea's demographic structure inevitably leads to rising fiscal deficits, so it must be viewed from a mid-to-long-term perspective," Yang Jun-seok, professor of economics at Catholic University, said. "Structural reforms to respond to demographic changes, such as extending the retirement age, must begin immediately."
