A recent analysis shows South Korea is the most vulnerable among emerging Asian economies to shifts in U.S. interest rates, as intensifying bear steepening in the U.S. Treasury market sees long term yields rise faster than short term rates, increasing the sensitivity of South Korean government bonds to U.S. rate movements.
According to a May 5, 2026, analysis by Bloomberg, every 1 basis point steepening of the U.S. Treasury yield curve results in a 0.41 basis point steepening of South Korea’s government bond curve, exceeding India at 0.40 basis points and Thailand at 0.16 basis points, placing South Korea at the top of Asian markets in terms of exposure to U.S. rate shifts.
Steven Chu, Asia foreign exchange and interest rate chief strategist at Bloomberg Intelligence, said South Korea shows the highest vulnerability among emerging Asian economies, a view reinforced by the country’s low nominal bond yields, which heighten the risk of negative real rates in inflationary conditions and reduce the attractiveness of South Korean bonds to foreign investors.
Leonard Kwan, a portfolio manager at T. Rowe Price in Hong Kong, noted that when assessing the spillover effects of yield curve steepening in developed markets, South Korea stands out because of its relatively low yields.
The growing sensitivity raises concerns about forced synchronization with U.S. monetary policy, which could weaken policy independence at the Bank of Korea and increase interest burdens for households and businesses if rising U.S. driven long term rates offset domestic easing efforts.
Pressure may also intensify on currency hedged funds in the South Korean bond market, where a significant share of foreign inflows is driven by arbitrage strategies tied to interest rate differentials, making these funds highly responsive to changes in the U.S. Treasury yield curve and capable of pushing domestic long term rates higher.
Market volatility increased after Donald Trump said in a May 4, 2026, NBC interview that he favors monetary easing and would not have nominated Kevin Warsh as Federal Reserve chair without support for rate cuts, sending the U.S. 2 year Treasury yield down about 2 basis points to around 4.12 percent.
At the same time, the U.S. 10 year Treasury yield rose about 6 basis points to above 4.30 percent on concerns over future inflation and increased Treasury issuance, widening the 10 year minus 2 year yield spread to roughly 18 basis points, the steepest increase since July 2022.