Rising rates and record household debt demand caution

Global bond yields are surging due to concerns that a prolonged conflict in the Middle East could fuel inflation. The yield on 30-year U.S. Treasury bonds climbed above 5 percent last week, and government bond yields in Japan, Britain and Germany have risen sharply as well. But Korea's 10-year government bond yield is now in the low 4 percent range.

Compared to safer assets such as government bonds, higher interest rates typically weaken the appeal of stocks. The enthusiasm surrounding AI-related investments may also cool if rates continue to rise, as higher discount rates reduce the present value of future profits. Korea's stock market turbulence has likewise been closely tied to rising global yields. On Tuesday, the Kospi fell more than 3 percent.

Even as borrowing costs rise, household debt continues to expand. Household credit outstanding reached a record 1.99 quadrillion won ($1.32 trillion) as of the end of March, up 14 trillion won from the end of last year, based on an exchange rate of 1,500 won per dollar. The increase reflects continued "yeongkkeul" borrowing — a Korean term describing buyers stretching their finances to the limit to purchase homes — as well as leveraged stock investments known in Korean as "bittu."

Margin loans used for stock trading, often viewed as a key indicator of speculative borrowing in the market, have exceeded 36 trillion won — another record high. Recently, Bank of Korea Senior Deputy Gov. Yoo Sang-dai signaled a possible policy shift, saying that it may be time to stop cutting rates and begin considering increasing them instead.

If interest rates rise while debt levels remain heavily inflated, the burden on households will grow sharply. According to the Bank of Korea, even a 0.25 percentage point increase in lending rates would raise household interest payments by 3.2 trillion won annually.

At this stage, all sectors of the economy must prepare for the possibility of persistently higher global rates. Households and businesses alike should manage finances more conservatively. Rising bond yields also increase corporate borrowing costs, making investment and expansion more expensive.

Additionally, the government should exercise caution when emphasizing expansionary fiscal policy without regard to market conditions. Korea's bond yields have risen faster than those of other advanced economies, partly because of strong semiconductor exports but also because of the government's repeated promises of fiscal expansion. If fiscal spending intended to support livelihoods ultimately pushes market interest rates higher, its effectiveness becomes questionable.