Asian markets opened Tuesday with a stark divergence: South Korea's KOSPI jumped more than 3% as trading resumed after a holiday, lifting MSCI's Asia-Pacific index outside Japan by 0.8%. Meanwhile, bond markets signaled rising borrowing costs, with the US 10-year Treasury yield climbing to around 4.73% and the 30-year yield reaching about 5.31%, its highest level in over two decades. Japan's 10-year government bond yield also touched 2.945%, a three-decade high.
The contrasting moves highlight a growing tension between powerful AI-driven earnings and the rising cost of long-term capital. Investors are betting that semiconductor giants like Samsung Electronics and SK Hynix can outpace the drag from higher discount rates, but bond markets suggest cheap money is not returning.
AI memory demand fuels KOSPI rally
Korean equities have recovered sharply from July's rout, with Samsung and SK Hynix at the center of the move. Macquarie Capital recently described the industry as facing the “worst memory crunch in history” and sees no supply constraints easing within the next three years. The firm also called AI inference-driven memory demand “off the charts,” explaining why investors are willing to look through higher yields.
If memory shortages persist, earnings growth at Korea's biggest chipmakers could remain strong enough to offset some valuation pressure from rates. However, Citi is less comfortable than earlier this year. Strategist Dirk Willer noted that the semiconductor-heavy KOSPI had previously met the firm's definition of bubble-like conditions before dropping back below that threshold. Citi, which recommended taking profits in June, is now on the sidelines, remaining “bullish but somewhat nervously.”
Bond markets signal higher capital costs
The rise in long-term Treasury yields is not simply a bet on another Federal Reserve rate increase. Softer US economic data has actually reduced expectations for an imminent move. Instead, investors are demanding more compensation for inflation risk, heavy government borrowing, geopolitical uncertainty, and growing competition for capital.
ING strategists Padhraic Garvey and Benjamin Schroeder said Treasuries remain under pressure, especially at the long end. They noted that earlier moves above roughly 4.65% in the 10-year yield were often followed by reassuring signals from Washington about a possible resolution to the Iran conflict. “This time, we're not hearing the same,” they wrote.
Asia's next risk: the cost of capital
BlackRock Investment Institute argues that strong equities and elevated bond yields are not necessarily contradictory. AI-driven earnings can continue to support stocks even as the buildout itself increases demand for capital. Governments, hyperscalers, and companies are competing more aggressively for capital, and BlackRock believes long-term yields still have room to rise.
That matters for Korea's technology-heavy market. Samsung and SK Hynix can continue benefiting from exceptional memory demand, but higher long-term yields increase the discount rate applied to future earnings. They also make the enormous investment required for AI infrastructure more expensive.
For investors, the key question is whether AI earnings can outrun the rising cost of capital. Recent KOSPI momentum suggests optimism, but bond markets are flashing caution. As debt and yields climb, the risk of a valuation squeeze grows. Meanwhile, AI memory opportunities remain a powerful tailwind for chipmakers, but the cost of capital could become the next hurdle for Asian markets.
This article is for informational purposes only and does not constitute financial advice.
