South Korea’s sovereign bonds are the most vulnerable in emerging Asia to a steepening US Treasury curve, according to a recent Bloomberg analysis. The study examined four instances over the past year where the US yield curve steepened, with long-term rates increasing more rapidly than short-term rates.
The analysis points to South Korea’s comparatively low yields as providing a limited buffer against movements in US Treasuries. This makes them particularly sensitive to both US rate fluctuations and the recent trend of curve steepening. Further exacerbating the risk is the record level of foreign ownership in South Korean local debt, which amplifies vulnerability when global yield curves steepen.
Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence, noted that the sensitivity stems from foreign funds using US dollars often employing currency hedges to purchase Korean debt, seeking enhanced returns. Chiu stated that the Korean Treasury bond curve is the most exposed in emerging Asia to steepening in the US Treasury curve.
The study indicated that, on average, the yield spread between South Korea’s three- and 10-year bonds increased by 8 basis points for every 20-basis-point steepening in the US Treasury curve across the four scenarios. Currently, the South Korean yield curve is already exhibiting signs of steepening, with yields on 10-year bonds reaching 3.72 per cent, widening the gap with three-year notes to approximately 50 basis points, marking the most significant spread since 2022.
