The Bank of Korea released a report titled "Analysis of the Synchronization of Korean and U.S. Long-Term Interest Rates" on the 20th.
The BOK analyzed daily movements in 10-year Korean and U.S. government bond yields from 2001 through June 2024 and found that synchronization was strongest immediately after the 2008 global financial crisis and during the global inflation shock triggered by COVID-19 in 2021. During those periods, Korean and U.S. long-term rates moved in the same direction more strongly, and the tendency for volatility to widen or narrow together was also greater.
U.S. inflation was identified as the factor with the largest influence on the synchronization of Korean and U.S. long-term rates, contributing about 41%. It was followed by U.S. long-term interest rates (22.7%), Federal Reserve monetary policy (18.3%) and the U.S. economy (18%).
The BOK said, "We analyzed the transmission channels of Korea-U.S. rate synchronization by dividing them into a policy channel and a risk-compensation channel, and found that U.S. inflation mainly affected Korean long-term rates through the policy channel."
The policy channel refers to the path through which external shocks are reflected in expectations for a central bank's current and future policy rates, moving the expectations component of long-term rates. The risk-compensation channel refers to the path through which risk compensation for investors is adjusted, moving the term premium.
Synchronization between Korean and U.S. long-term rates was also strong when the Fed implemented unconventional monetary policy such as quantitative easing. Both short- and long-term Korean rates fell around major quantitative easing announcement dates, and the decline in Korean long-term rates was attributed to the policy expectations channel rather than risk compensation.
