Global interest rates rise on QE exit

The announcement of the U.S. Federal Reserve’s plan to scale back its monetary stimulus has sent interest rates on long-term state bonds around the world upward, indicating that the end of a low-interest era is nearing.

Expectations that a tight monetary policy will follow the tapering of quantitative easing in the U.S. on the back of economic recovery have led investors worldwide to unload their fixed-income securities to avert further losing value on their bonds, analysts said.

The basic scenario for the Fed’s exit plan is that the U.S. central bank will likely increase its key rate in 2015 when it achieves a jobless rate of about 6 percent, after it completely unwinds its money easing next year, according to Yoon Chang-yong, an analyst at Shinhan Investment.

The U.S. generally targets its unemployment rate in the range of 5 to 6 percent as a high job rate could add upward pressure on inflation, which it seeks to maintain around 1 percent.

The Fed, then, is expected to sell back its treasuries and mortgage securities in 2016. It had purchased them at a near-zero key rate from the government and the financial markets since the global crisis of 2008.

These projections affected the bond markets ― including in Korea, where yields have increased and bond prices have dropped ― on the back of selloffs, as they move inversely with one another.

Interest rates on 10-year treasuries increased from the upper 1 percent range last month to 2.54 percent early this week, while the U.K. also saw its interest rates on 10-year gilts increase from 2.22 percent to 2.53 percent over the last month. German government bond yields increased from 1.51 percent to 1.81 percent as well.

The Fed’s exit strategy, compounded with a looming credit crisis in China, has affected the Korean financial markets where stock and bond prices fell on increased volatility as predicted by the Bank of Korea.

BOK Gov. Kim Choong-soo previously warned of the rise of global interest rates following the Fed’s exit from printing and pumping money into the financial system, and side effects that had been created during the low-interest era amid a widespread pursuit of higher-yielding assets.

Interest rates on Korean 10-year notes increased from 3.12 percent to 3.68 percent over the past month, while the benchmark KOSPI lost more than 120 points since the Fed unveiled its monetary exit last week.

With sufficient market liquidity and the growing pressure of interest rate rises, the Korean central bank is unlikely to lower its key base rate again this year.

“The focus will be more on the second half of the year,” HSBC Global Research said in a statement. “Weaker external demand and financial market volatility pose downside risks to Korea’s growth forecast. We believe the central bank will keep rates low at 2.50 percent to support growth for the remainder of the year.”

By Park Hyong-ki (hkp@heraldcorp.com)