Bond market shock rekindles global debt concerns

When Standard & Poor’s downgraded the U.S. credit rating in August 2011, I visited the Daewoo Securities (now Mirae Asset Securities) trading floor in Yeouido, Seoul. The air was heavy with silence and sighs. Every stock was plunging, bathed in blue on the monitors. Traders sat frozen, their faces tense. One whispered, “Please even silence your footsteps.” That was the mood.

The memory came rushing back on May 16 (local time), when Moody’s lowered the U.S. credit rating by one notch from Aaa to Aa1. For a few days, markets held steady. Having weathered two previous downgrades, and with this one long expected, it seemed the impact would be mild. On May 18, Treasury Secretary Scott Besant brushed off the news, saying, “Who cares? Qatar doesn’t. Neither do Saudi Arabia or the UAE. They’re still pouring money in.”

But the bond market did not ignore the debt anxiety Moody’s had flagged. Within days, a weak U.S. Treasury auction combined with growing unease over former President Donald Trump’s proposed sweeping tax cuts to trigger a sharp reaction. On May 21, yields on 20-year Treasury bonds topped 5 percent, while the 10-year yield jumped to the 4.6 percent range, signaling a sharp drop in bond prices. Faced with massive U.S. debt and shaken investor confidence, bondholders began dumping Treasurys. Yields in Japan, the United Kingdom and Germany also climbed as rising deficits stirred global jitters.

In a market flush with liquidity, the sight of U.S. and Japanese bonds, long considered the safest of assets, staggering in tandem raised alarms. Some analysts suggested that bond vigilantes, investors who push back against fiscal irresponsibility by selling government bonds, were sending a warning about deteriorating public finances. Prominent investors added their voices. Ray Dalio, the hedge fund titan, warned on May 22 that “we should be afraid of the bond market.” He said that if we assess the situation like a doctor examining a patient, the accumulated debt appears to have reached a very serious level.

South Korea is not exempt from this debt anxiety. Last year, the government posted a managed fiscal deficit of 104.8 trillion won. According to the International Monetary Fund, Korea ranks fourth among 11 non-reserve currency countries in terms of debt-to-GDP ratio.

And the bond shock is not limited to debt markets. It can ripple through the broader economy. Mortgage and student loan rates are tied to government bond yields. When those yields rise, so do corporate borrowing costs. Households and businesses face steeper interest payments, which in turn reduces spending and investment.

Debt is never light. The recent U.S. bond market tremor showed that even the world’s largest economy and the issuer of the global reserve currency can lose market trust when deficits spiral out of control. This is a stark reminder for Korea to keep reassessing the true burden of its own debt.