Lee Ju-yeol "Actively Purchasing Government Bonds During Market Instability Due to COVID-19" (Comprehensive)

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, delivered a message that if the market continues to show instability due to the ongoing impact of the novel coronavirus infection (COVID-19), the Bank will actively purchase government bonds.

At a press conference immediately following the Monetary Policy Committee meeting on the 9th, Governor Lee said, "Although the base rate was lowered by 0.5 percentage points in March, it is true that the decline in long-term interest rates was limited," adding, "This is because long-term market interest rates in major countries have all shown an upward trend, and there are forecasts that government bond issuance will increase due to the supplementary budget."

He continued, "It is expected that government bond issuance will increase this year to secure funds for COVID-19 response," and stated, "If necessary depending on market conditions, we plan to actively purchase government bonds to stabilize the market." The Bank of Korea is also scheduled to announce its government bond purchase plan later that afternoon.

However, Governor Lee added, "Since late last month, factors that had limited the decline in long-term interest rates have eased, and long-term interest rates have shifted to a downward trend."

On the previous day in the Seoul bond market, both government bond and corporate bond interest rates fell simultaneously. The 3-year maturity government bond yield closed at 1.024% per annum, down 2.3 basis points (1bp = 0.01 percentage points) from the previous trading day. The 10-year yield fell by 6.9bp to 1.511% per annum. The 5-year and 1-year yields dropped by 5.4bp and 2.0bp, closing at 1.264% and 0.891% per annum, respectively.

The 3-year AA- rated unsecured corporate bond yield also decreased by 0.3bp to 2.097% per annum. However, the yield spread between the 3-year government bond and corporate bond was 107.3bp, the highest since December 7, 2010 (112.0bp).

Corporate commercial paper (CP) yields, which had surged for a while, are gradually stabilizing as government market stabilization measures such as the Bond Market Stabilization Fund (Cha-an Fund) have been implemented. The 91-day CP yield closed at 2.18% per annum the previous day. Prior to this, CP yields had risen for 12 consecutive trading days until the 2nd, then declined or remained flat from the 3rd onward.

Governor Lee judged that the current corporate bond and CP markets are relatively stable and that the unrest is calming down. He said, "We are monitoring the situation together with the Financial Services Commission, and the assessments of the Financial Services Commission and the Bank of Korea are aligned." However, he added, "Since there is a possibility that financial market instability may reoccur depending on the development of COVID-19, preparations for that are necessary."

The Bank of Korea is also considering measures to ensure the safety of the corporate bond market through loans to securities firms and other non-bank financial institutions for this reason. If securities firms, which have become short of liquidity, dump corporate bonds they hold into the market, the bond market will become unstable. Instead, the Bank of Korea plans to take corporate bonds as collateral and provide loans to securities firms. However, Governor Lee added that this matter requires consultation with the government, and detailed plans are currently under review.

Governor Lee emphasized, "Loans to specific companies under Article 80 of the Bank of Korea Act are fundamentally exceptional measures that go beyond the usual functions of a central bank," explaining, "This is why government opinions are necessary."

However, regarding the provision of funds to a special purpose vehicle (SPV) funded by the government, like the U.S. Federal Reserve (Fed), to purchase corporate bonds and CP, he said, "It is not yet appropriate to disclose any progress (with the government) at this time."

This content was produced with the assistance of AI translation services.