Bond Yields Hit 24-Year High as Governments Keep Spending While Central Banks Raise Rates

Government bond yields have reached their highest level since 2002, a 24-year high, even though more money is being released into markets. Rates face upward pressure while liquidity expands, because monetary policy leans toward tightening and fiscal policy remains expansionary. Market volatility is growing as a result.

An analysis presented by The Man Who Explains the Economy (Kim Kwang-seok TV) on YouTube sets out three key variables pushing yields higher, along with the structural contradiction the market now faces. Its main point is that liquidity is being released, but in an unusual way, by pushing bond yields up as it goes.

Raising rates while spending

Major economies are raising rates to fight inflation. The Bank of Korea raised rates in July and August in a row, the United States did so in September, and the eurozone and Japan have each raised rates twice. Fiscal policy, however, is still pumping money out. Professor Kim Kwang-seok described the situation as "between the danger of debt and the sweetness of liquidity."

Expansionary fiscal policy means governments issue bonds in large volumes, and a bigger supply of bonds puts upward pressure on yields. In the past, central banks typically cut rates while loosening fiscal policy. Now governments are issuing bonds heavily and spending even as rates rise, which the analysis calls an unusual phase. The funds they inject supply liquidity to the market, because borrowing offers the short-term "sweetness" of liquidity. That same spending acts as a defense against a collapse in asset markets. Higher rates normally weigh on assets, but government liquidity means stocks tend to hold in a range instead of plunging, or particular sectors gain strength. The United States, in particular, shows a strong upward trend under expansionary fiscal policy.

Wars and elections drive the borrowing

Kim named the US midterm elections and the situation of countries at war as the main reasons governments accept upward pressure on yields. The United States is considering large-scale fiscal spending ahead of the midterms. Countries at war have little choice but to raise funds through bond issuance, to pay for rebuilding energy storage, transport and oil drilling facilities that have been destroyed, and for huge weapons spending.

South Korea is not a party to any war but is feeling the economic shock. Fiscal spending continues through disaster relief payments and an energy price cap meant to stop prices from surging. Global economic growth this year is at its lowest since the pandemic. South Korea is softening the blow through its semiconductor industry, part of the AI value chain: Samsung Electronics' preliminary third-quarter operating profit topped 100 trillion won, and surging chip exports are serving as a mainstay of the economy.

Oil, war and the missing buyers

The first variable is geopolitical risk. Rising tension, such as the Middle East war, lifts international oil prices, which stokes inflation expectations and adds to pressure for higher rates. According to the video, the Middle East risk began in late February and has not ended. Tension in the Strait of Hormuz and other geopolitical factors directly affect oil prices and inflation.

In the past, oil-producing countries that profited from higher oil prices bought large amounts of US Treasuries, helping keep yields stable. A typical case was 2022, during the Russia-Ukraine war, when Saudi Aramco posted record operating profit of 100 trillion to 120 trillion won, which supported demand for bonds. The pattern is different now, as Middle Eastern producers are hesitant to buy US Treasuries despite higher oil prices. This suggests that unease over whether US military power can fully protect its allies, along with geopolitical uncertainty, is suppressing demand for the bonds. Geopolitical anxiety lifts oil prices, which in turn weakens bond buying. Kim explained that geopolitical factors thus affect both a macroeconomic factor, inflation, and a supply-demand factor, reduced bond purchases, through oil prices, making for a compound cause.

Source: original video (YouTube)