Increase in Economic and Credit Risks if U.S. 10-Year Treasury Yield Exceeds 5.2%

If the U.S. 10-year Treasury yield exceeds 5.2%, it could lead to simultaneous increases in economic downturn and credit risks, according to analysis. The current yield is at 4.6%, which is below the critical threshold, but there are pressures for long-term interest rates to rise in the second half of the year. Jeong Yong-taek, an economist at IBK Investment & Securities, suggests an appropriate yield of 4.2%, stating that 5.2% is the critical interest rate for this economic cycle. He emphasized that Korea's economic expansion relies on U.S. investment demand. Rising long-term interest rates would lead to a decline in existing bond prices and increase borrowing costs for businesses and governments, which would also affect the discount rates of risk assets. Jeong warned that if the yield approaches 5.2%, there is a high likelihood that credit-related indicators will worsen. He diagnosed that at the current interest rate level, the possibility of an immediate economic downturn or realization of credit risks is low. Recently, the yield on the U.S. 10-year Treasury auction reached 4.683%, the highest level since the financial crisis. Factors contributing to the upward pressure on rates in the second half of the year include abundant liquidity, high inflation levels, and increased funding demand from big tech companies. Jeong forecasts that whether the 10-year yield approaches 5.2% by the end of the year, when the U.S. midterm elections are scheduled, will be a key criterion for assessing economic and credit risks.