The new price of capital

: Surging global bond yields threaten Korea as sovereign debt and AI borrowing collide

For years, cheap money made debt look almost harmless. The bond market now offers a more expensive lesson.

Long-term government bond yields have surged across major economies, with the US 30-year Treasury yield briefly topping 5.33 percent, its highest since 2007. Japan's 10-year yield reached a three-decade high of 2.95 percent, while French, German, British and South Korean yields reached multi-year or record peaks.

This is more than a temporary market reaction to central-bank policy. Short-term US yields have stayed relatively stable as rate-cut expectations persist, even as long-term yields climb.

Investors are demanding higher compensation to hold long-duration paper as sovereign borrowing expands, inflation remains unpredictable and bond supply swells worldwide.

Fiscal policy sits at the heart of this shift. US federal debt is rapidly approaching US$40 trillion, with annual interest servicing exceeding $1 trillion, a figure that now rivals its defense budget.

Japan is pursuing expansionary spending despite a debt burden above 250 percent of gross domestic product. European governments face heavy funding needs that add further upward pressure on global borrowing costs.

Then there is artificial intelligence. The AI-driven tech boom has created a massive new borrowing class. Amazon, Alphabet, Microsoft, Meta and Oracle are tapping credit markets heavily to finance data centers and chip purchases.

The five hyperscalers are set to issue roughly $250 billion in bonds this year, double last year's figure, with their total corporate issuance expected to expand further in 2027.

The implications extend far beyond Big Tech. Government bonds and top-rated corporate debt are competing for the same investors. When bond supply and inflation uncertainty rise together, borrowing costs can climb across the market.

AI investments may eventually generate enough productivity to justify this leverage, but bondholders will not finance that potential cheaply.

Energy adds another layer of complication. Ongoing friction near the Strait of Hormuz has pushed oil higher and revived broad price pressures. That matters because long-dated paper is sensitive to inflation risks. Even if central banks trim benchmark rates, high long-term yields keep mortgages, corporate debt and private consumer loans expensive.

South Korea has little insulation from this shift. Its export-dependent economy is exposed to global capital flows and domestic long-term rates track major global markets closely. The sharp gyrations of the benchmark Kospi this week showed how fast bond market anxiety spreads to equities.

A fragile household balance sheet makes this transition all the more painful. The latest data from the Bank of Korea showed that Korea's household credit reached a record 2,019.8 trillion won ($1.45 trillion) at the end of June, rising 25.9 trillion won in the second quarter, the largest quarterly surge since late 2021.

Housing demand and stock market borrowing both drove the increase, raising the potential for higher borrowing costs to weigh on domestic spending.

The upswing in capital costs also threatens Korea's chip-export model. Expensive debt could curb the hyperscaler infrastructure spending that fuels demand for advanced memory components. This could undermine a key driver of export growth.

Policymakers must resist managing this strain with temporary liquidity injections or relaxed credit caps. Such fixes offer only brief relief, leaving underlying leverage unaddressed.

The necessary response is to tackle key issues head-on. Fiscal policy should preserve market confidence through clear spending boundaries, especially when tax revenues benefit from temporary chip windfalls. Monetary policy must keep inflation expectations anchored and steer targeted credit protections toward truly vulnerable borrowers.

Cheap capital encouraged governments, firms and households to borrow as if credit conditions were permanent. The markets are now shattering that assumption. For Korea, adjusting early is far better than waiting until high yields become the norm.

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