South Korea's three-year treasury yield rose to 4.014 percent on Aug. 11, the highest level since November 2023. The 10-year yield climbed to 4.540 percent, a fresh high since October 2022, signaling broad curve steepening.
U.S. Treasury yields are the primary driver. A widening fiscal deficit and tariff uncertainty have kept longer-dated U.S. rates elevated. The August consumer price index rose 3.4 percent year-over-year and 0.4 percent month-over-month, matching expectations. But core CPI climbed 0.3 percent month-over-month, exceeding the 0.2 percent forecast. That stronger core print has dimmed near-term Fed cut expectations.
Oil benchmarks compound the pressure. Escalating Middle East tensions, particularly involving Iran, have pushed Dubai crude, Brent and West Texas Intermediate above $100 a barrel. Seoul's own inflation accelerated to 3.1 percent in August, up from the 2 percent range in July.
The won weakened 6.7 won against the dollar to close at 1,345.9 won, reflecting capital outflows and currency instability.
The Bank of Korea faces a bind. Easing policy to defend bonds risks stoking both inflation and won weakness. Choi Jae-won, an economics professor at Seoul National University, said rate cuts do not automatically lift bond prices. If inflation risks persist, bond selling could accelerate, pushing yields higher still.
Fiscal expansion poses its own constraint: additional treasury issuance would add bond supply at a moment when foreign inflows are slowing. Market observers recommend targeted spending in sectors hit hardest by external shocks rather than broad fiscal stimulus.
The government plans to establish a 162.3 trillion won response fund starting next year, with 12.5 trillion won directed to the general account to reduce new treasury issuance. Another 104.4 trillion won will be held in reserve after accounting for project spending and other outlays.
