Prolonged interest rates weigh on Korean economy

Concerns of prolonged interest rates have fueled the increase of interest rate on 10-year U.S. government bonds to 4.8%, breaking a 16-year high. This has impacted the Korean financial market, driving down the value of the won and stock prices on Wednesday. 

On Tuesday (local time), the interest rate on 10-year U.S. Treasury bonds, which serves as a threshold for global bond interest rates, rose 0.12 percentage points from the previous day to 4.81%, breaking the highest point since August 2007. The interest rate on 30-year U.S. Treasury bonds also rose to 4.95%, approaching the 5% level. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) rose 2.17 points (12.32%) from the previous day to 19.78, breaking a new high in six months. VIX exceeded 20 at one point during the day.

Korea’s financial market, which re-opened on Wednesday after the long Chuseok holiday, was shaken by the news of higher for longer U.S. interest rates. The won-dollar exchange rate closed at 1,363.5 won, a sharp increase of 14.2 won from the previous trading day (the value of the won plummeted), replacing records since Sept. 27 (1,356 won).

KOSPI closed at 2,405.69, going down by 59.38 points (2.41%). Six months have passed since the KOSPI dropped to the 2,410 level on March 27 of this year. The KOSDAQ index also plunged by 33.62 points (4.00%).


dhlee@donga.com