US Treasury Yields Surpass 5%, Attention Focused on Interest Costs Exceeding Defense Spending

As US Treasury yields surpass the 5% line and changes in asset markets are expected, attention is being drawn to the massive interest cost burden of the US government and the economic slowdown signals suggested by the yield curve inversion. Dr. Gwak Su-jong, through recent economic analysis, explained the impact of the US government's fiscal burden and interest rate structure on the economy.

Treasury Yields Exceed 5% and the Warning of 'Yield Curve Inversion'

Recently, US Treasury yields have been showing an upward trend following the Federal Reserve's interest rate hike in September. In the video, it was mentioned that discussions are taking place regarding whether Treasury yields could exceed 5% and reach 5.3% or 5.5%. Since this rise in interest rates serves as the benchmark for 15-year or 30-year fixed-rate mortgages in the United States, analysis suggests that mortgage rates could rise from 7% to 8%.

A particularly noteworthy indicator is the 'yield spread (difference between long-term and short-term rates)'. Generally, long-term rates are expected to maintain a positive (+) value higher than short-term rates to reflect inflation. However, if an 'inversion phenomenon' occurs where short-term rates become higher than long-term rates, according to research by economic societies, there is a high possibility of an economic slowdown occurring within at least 6 months or 1 year. Dr. Gwak explained that in most of the eight cases of yield spreads that have occurred since 1990, economic slowdown phenomena appeared due to yield inversion.

Interest Costs Exceeding Defense Spending and the Interest Rate Competition Among Corporations

Rising interest rates are increasing the fiscal burden on the US government. According to the video, while the United States spends slightly more than 800 billion dollars on defense per year, the amount spent on interest costs exceeds 1 trillion dollars. To cover the shortage of resources, the government must borrow money by issuing bonds, and the structure is such that interest costs increase as rates rise. Currently, the US economy is estimated to grow at a level of 2.0–2.5%, but war costs and the rapid increase in interest costs are becoming a burden.

Furthermore, as demand for funds concentrates on platform companies such as AI semiconductor or GPU providers, 'interest rate competition' is occurring within the market. As the number of demand sources seeking funds increases, they are in a situation where they must call for high interest rates against each other. In the video, examples such as SpaceX issuing corporate bonds after its IPO and Meta issuing corporate bonds at a rate in the 8% range about 3 months ago were used to explain that the cost of securing funds in the market is rising.

Vulnerability of the South Korean Economy and the 'Yen Carry Trade' Variable

The high-interest rate stance in the United States also affects the South Korean economy. Dr. Gwak Su-jong pointed out the structure where the South Korean economy is unilaterally dependent on semiconductors, analyzing that if the semiconductor industry cools down, South Korea's growth rate could suddenly fall below 1%. If South Korea's 10-year bond yield does not stay in the mid-4% range but instead soars to the 6–7% range, there is a possibility that foreign capital, targeting exchange rate volatility and interest rate differentials, will flow out to the United States. This risk exists in a situation where the exchange rate is fluctuating between 1,350 won and 1,450 won.

Another variable in global fund flows is the 'unwinding of the Yen Carry Trade' in Japan. Japan is also in a situation where Treasury yields are rising and 10-year yields exceed 3%. In the video, it was explained that people who invested in overseas assets by borrowing yen during the past low-interest rate period may move to sell assets and repay yen to avoid exchange losses resulting from the rise in the value of the yen. This is one of the scenarios mentioned with a probability of about 20–25%.

Ultimately, in predicting the direction of the economy, it may be more efficient to focus on interest rate policy rather than fiscal policy. This is because while fiscal policy has high volatility depending on tax revenue and expenditures, interest rates act as a 'steering wheel' that spreads its effects evenly across the entire economy.

Source: original video (YouTube)