South Korea Faces Rate-Hike Pressure as Bond Yields Hit Multi-Year Highs

South Korea's government bond market is reflecting a marked shift in interest-rate expectations, with the 10-year yield climbing toward around 4.3%, near its highest level since late 2023. The move is being driven by strong artificial-intelligence-related investment and surging semiconductor demand, which are fuelling faster growth and stickier inflation and reinforcing expectations that the Bank of Korea will tighten policy. Swap markets have priced in the prospect of multiple rate increases, potentially lifting the policy rate from 2.5% toward 3.25%, even though the central bank remains formally in an easing cycle and has held its base rate steady across recent meetings. Inflation has become a growing concern, with the annual rate accelerating to a multi-year high in recent months amid higher energy costs linked to the Middle East conflict and a weaker won that raises imported-inflation risks. The central bank has lifted its inflation forecast for the year while also raising its growth outlook, citing robust demand tied to the AI-powered semiconductor upcycle. Additional pressure on yields comes from fiscal-spending uncertainty and the prospect of increased bond issuance, prompting authorities to step up market monitoring to curb volatility.