Treasury yields hit 24-year high, driven by three key variables

As market volatility increases with US Treasury yields recording their highest levels in 24 years since 2002, complex factors inducing the rise in interest rates have been analyzed. According to this analysis delivered by The Man Who Explains the Economy (Kim Kwang-seok TV), the current movement of Treasury yields can be understood within three major frameworks: geopolitical risks, macroeconomic factors, and supply-demand factors.

Geopolitical risks and the changed Treasury purchase patterns of oil-producing countries

The first factor is geopolitical risk. When geopolitical tensions, such as wars in the Middle East, escalate, international oil prices rise, which in turn stimulates inflation expectations, leading to upward pressure on interest rates. In the past, Middle Eastern oil-producing countries, which achieved massive current account surpluses due to rising oil prices, supported supply and demand by purchasing large amounts of US Treasuries with those funds. However, recently, as uncertainty regarding the United States' defense capabilities and its ability to protect allies has grown, a change in supply and demand is appearing where oil-producing countries, including Saudi Arabia, are not as actively purchasing US Treasuries as they did in the past. This suggests that geopolitical factors are intertwining with supply-demand factors to create a new pattern that pulls up interest rates.

The mismatch between monetary tightening for inflation response and expansionary fiscal policy

The second is macroeconomic factors. As major countries around the world face inflation exceeding the target inflation rate of 2%, central banks in each country are implementing monetary tightening through interest rate hikes. Along with the Bank of Korea, the United States, the Eurozone, and Japan are responding with interest rate hikes, increasing the upward pressure on interest rates.

A point that deserves particular attention is the 'mismatch' between monetary policy and fiscal policy. While current monetary policy maintains a tightening stance, fiscal policy is instead showing an expansionary trend. The United States is injecting large-scale finances ahead of mid-term elections, and countries involved in wars are increasing Treasury issuances to secure funds for weapons spending and reconstruction costs. South Korea is also in a situation where it is injecting finances to mitigate economic shocks. In this way, when the volume of Treasury issuances pours out to expand finances, Treasury yields rise even further in a situation where there is insufficient buying power to absorb them. In other words, the structural situation of raising interest rates while simultaneously issuing a large amount of Treasuries is cited as one of the main causes of the surge in interest rates.

The trade-off between liquidity supply and asset markets

Expansionary fiscal policy plays a role in supplying liquidity to the market while simultaneously causing debt problems. The liquidity supplied through fiscal injection acts as a force that prevents stock prices from plummeting, even amidst the phenomenon where asset markets are suppressed due to the rise in Treasury yields. In the case of South Korea, amidst these macroeconomic difficulties, the AI value chain and semiconductor exports are surging, serving as a buffer to mitigate economic shocks. As the performance of semiconductor companies such as Samsung Electronics and SK hynix rebounds, a phenomenon is appearing where funds related to AI are being concentrated.

Source: original video (YouTube)