[3rd Supplementary Budget] Bank of Korea "Will Purchase Government Bonds Anytime if Bond Market Becomes Unstable"

"Purchase scale, timing, and conditions will not be disclosed in advance"

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] As the scale of deficit bonds this year approaches 100 trillion won due to the government's third supplementary budget (supplementary budget) funding, the Bank of Korea plans to purchase government bonds whenever the bond market shows signs of instability.

On the 3rd, a senior official from the Bank of Korea stated, "We are closely monitoring market conditions and considering all options," adding, "If the bond market becomes unstable, we will actively purchase government bonds at any time." However, the official added, "We will not disclose the overall purchase scale, timing, or conditions in advance," explaining, "This is because market participants might wait solely for the Bank of Korea's bond purchases, causing the purchase volume to increase beyond what is necessary." To secure market flexibility, it was judged better to purchase government bonds irregularly depending on the situation.

The government decided to issue government bonds worth 23.8 trillion won to secure funds for the third supplementary budget. Although the government will adjust the issuance volume, since it announced an early execution policy for the supplementary budget, a significant portion of the total volume is expected to be issued in the third quarter. If a large volume of government bonds floods the market, it may not be absorbed, causing bond prices to plummet (market interest rates to rise). This would lead to a crowding-out effect where the financing costs for households and companies linked to this increase, and the effect of lowering the base interest rate to a historic low (0.5% per annum) could disappear.

Dongnak Gong, a researcher at Daishin Securities, said, "In the past, when supplementary budgets were implemented, most of the issued government bonds had short maturities, but recently, the proportion of long-term bonds with maturities over 10 years is expected to increase," adding, "In the past, buyers such as the National Pension Service, asset management companies, and even banks absorbed the government bonds, but this time, there are no buyers in the market, so the Bank of Korea will have to purchase them." The scale of government bonds the Bank of Korea is expected to purchase is roughly around 10 trillion won. Changseop Oh, a researcher at Hyundai Motor Securities, said, "I expect the Bank of Korea to purchase about half of the total volume."

However, the bond market remains stable for now. As of 10 a.m. on the day, the 10-year government bond yield was trading at 1.362%, down 1.6 basis points (1bp = 0.01 percentage points) from the previous day. The 3-year government bond yield was trading at 0.847%, down 0.4 basis points from the previous day. Although an increase in deficit bonds due to the supplementary budget is expected, interest rates are currently falling. The belief that the Bank of Korea will support the market through government bond purchases at any time seems to be working to lower interest rates. Experts consider a yield spread of more than 60 basis points between the 3-year and 10-year government bonds to be large. Researcher Gong said, "The upper limit of the 10-year bond yield is expected to be 1.45%, and the lower limit of the 3-year bond yield is 0.75%, so even under extreme assumptions, the yield spread could widen up to 70 basis points."

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