![Bank of Korea Gov. Shin Hyun-song gavels open a Monetary Policy Board meeting on May 28. [Bank of Korea]](https://wimg.heraldcorp.com/news/cms/2026/07/15/news-p.v1.20260528.6d580f7b628f4bb9a8cbad10db65c59c_P1.jpg)
The spread between South Korean and US long-term government bond yields narrowed to its smallest margin in nearly three years last month, as South Korean yields rose more sharply than their US counterparts amid strong semiconductor exports and inflation concerns.
According to the Bank of Korea, South Korea's 10-year government bond yield stood at 4.18 percent in June, 0.29 percentage points below the US rate of 4.47 percent — the narrowest gap since July 2023, when the spread was minus 0.22 percentage points. The difference is roughly one-fifth the current gap between the two countries' benchmark interest rates: South Korea's policy rate stands at 2.50 percent against the upper bound of the US range at 3.75 percent, a difference of 1.25 percentage points.
US 10-year yields have exceeded South Korea's since December 2022, following the reversal of the two countries' benchmark interest rates in July of that year. The gap widened consistently thereafter, reaching 1.81 percentage points in January last year.
The spread has been narrowing since the second half of last year. In June, it shrank by 0.11 percentage points from the previous month's minus 0.40 percentage points. The move appears to reflect expectations that the Bank of Korea will enter a rate-hike cycle beginning with Thursday's Monetary Policy Board meeting, with one additional increase likely before year-end.
In the United States, inflation concerns have fueled expectations of rate increases, though forecasts for a hold are also gaining traction. A Bank of Korea New York office report found that seven of 10 major investment banks expect the Federal Reserve to keep rates unchanged for the rest of the year. In a May survey, five of the 10 banks had forecast a rate cut this year — a figure that has since fallen to just one.
Fed rate-hike expectations priced into US futures markets stood at 1.2 times for the remainder of the year as of July 6, up from 0.1 times in May.
The recent strength in semiconductor exports has significantly improved South Korea's growth outlook, and concerns about inflation and expansionary fiscal policy also appear to have contributed to the narrowing of the long-term yield gap. Long-term government bond yields reflect not only monetary policy expectations but also economic fundamentals such as growth and inflation. A stronger growth outlook tends to reduce demand for long-term bonds as safe-haven assets, pushing yields higher. Yields on long-term government bonds also tend to rise when economic uncertainty increases or when the government is expected to pursue expansionary fiscal policy.
The International Monetary Fund raised its forecast for South Korea's real GDP growth this year to 2.6 percent in its July World Economic Outlook, up 0.7 percentage points from its April projection of 1.9 percent. The South Korean government, in its second-half economic growth strategy released Tuesday, set its own GDP growth target for this year at 3 percent. If realized, that would mark the fastest expansion since 2021, when the economy grew 4.7 percent.
kimstar@heraldcorp.com
