Oil price shock combined with AI dividends pushes South Korea’s 10-year government bond yield above 4%, fueling market expectations of a rate hike.

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The yield on South Korea’s benchmark government bonds has broken through a key psychological threshold, and the bond market is undergoing significant repricing.

According to Bloomberg, the yield on South Korea’s 10-year government bonds rose 11 basis points to 4.06%, marking the first time it has surpassed 4% since the end of 2023. The dual driver behind this trend is: rising oil prices due to Middle East conflicts have pushed up inflation expectations, while growth fueled by the upswing in AI chips has created room for the central bank to tighten policy, together reinforcing market expectations for a rate hike.

Goldman Sachs accordingly raised its policy forecast for South Korea's central bank this year from “zero rate hikes” to “two 25-basis-point hikes”; Hana Securities also raised its expectation from “zero” to “one”. Nomura expects the Bank of Korea to send more hawkish signals in its rate dot plot.

Dual Forces: Oil Price Shock and Semiconductor Cycle

The simultaneous upward revision of inflation and growth expectations in South Korea has become the core logic behind the latest repricing of government bond yields.

South Korea's high dependence on imported oil makes it particularly vulnerable to the oil price fluctuations brought on by the current Middle East conflict. The transmission from rising energy costs to inflation is direct; coupled with the already evident strong growth momentum in the first quarter, the market’s assessment of diminished room for policy easing is further reinforced.

Meanwhile, the AI-driven rally in global tech markets has revived demand for memory chips, giving South Korea’s economy additional growth support. Since the beginning of the year, the Korea Composite Stock Price Index (Kospi) has surged by more than 81%.

Park Junwoo, Hana Securities’ fixed income strategist, said: “South Korea is facing inflationary pressure mechanically pushed up by rising oil prices, while the semiconductor super cycle is driving growth expectations higher. Both forces are combining and reinforcing each other.”

Hawkish Forces Strengthen, May Meeting Becomes Key Pivot

The change in the composition of the Bank of Korea’s committee provides structural support for policy path adjustments.

With the departure of the most dovish member, Shin Sung Hwan, Bloomberg Economic Research analysts say the overall bias of the committee has clearly turned more hawkish. Nomura Securities economists Jeong Woo Park and others pointed out in a report that accelerating headline inflation gives South Korea’s central bank stronger grounds to send hawkish signals, “because it directly influences inflation expectations and public perception of prices.”

Nomura predicts the Bank of Korea will unveil a more hawkish stance in its rate dot plot, but still expects rates to remain unchanged until next year; Goldman Sachs goes further, expecting two rate hikes this year. This divergence highlights that the market’s view of the policy path is still unsettled, and the May 28 meeting will be an important window to clarify the outlook.

Bond Market Under Pressure as Investors Price Policy Risk

The rapid rise in yields has left a clear mark on Korea’s bond market.

Calculated on a dollar-hedged basis, Korean government bonds have lost 6.4% so far this year, ranking among the worst performers in emerging market debt. Tuesday’s sell-off coincided with sharp volatility in the local stock market—a policy official’s comments on AI dividend distribution triggered a brief market correction, further amplifying intra-day sentiment swings.

Geopolitical risk, inflation upside, growth beating expectations, changes in central bank committee composition—multiple factors are jointly undermining the previously formed consensus of “no change in policy all year.” For fixed income investors, uncertainty regarding Korea’s interest rate path has risen significantly compared to several months ago.

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