May 3-Year Treasury Bond Yield Hits Record Low... "Impact of Base Interest Rate Cut"

As of the 25th of last month, foreign holdings of domestic bonds reached a record high of 143 trillion won, falling to 0.815%

[Asia Economy Reporter Oh Ju-yeon] In May, influenced by the 0.50% base interest rate cut by the Monetary Policy Committee, domestic bond yields fell sharply, especially for short-term bonds with maturities of three years or less. On the other hand, long-term bonds showed a 'curve steepening' (the yield curve becomes steeper as the gap between long- and short-term interest rates widens) as the decline in yields was limited due to concerns over supply-demand burdens such as increased issuance of deficit government bonds.

According to the 'May 2020 OTC Bond Market Trends' released by the Korea Financial Investment Association on the 8th, both short- and long-term interest rates fell sharply at the beginning of the month due to factors such as the responsibility theory for the novel coronavirus infection (COVID-19), US-China conflicts, foreign investors' spot and futures purchases, expectations of a rate cut by the Monetary Policy Committee, reduction in the target of the period industry stabilization fund, and concerns over the resurgence of COVID-19.

However, after mid-May, under continued expectations of a rate cut, concerns over a sharp increase in the scale of the 3rd supplementary budget, and the Bank of Korea's lack of a clear plan for simple government bond purchases, long-term interest rates rose, while the 3-year government bond yield hit an all-time low.

The 3-year government bond yield fell from 1.817% at the end of 2018 to 1.360% at the end of last year, and dropped to 0.815% as of the 25th of last month, marking an all-time low.

The bond issuance volume in May recorded 79.5 trillion won, decreasing by 500 billion won compared to the previous month despite increases in corporate bonds and ABS issuance. The outstanding issuance balance increased by 30.9 trillion won due to net issuance of financial bonds, government bonds, corporate bonds, and special bonds, reaching 2,160.2 trillion won.

The corporate bond credit spread showed polarization, with ultra-high-grade spreads narrowing and lower-grade spreads widening. Issuance of high-grade bonds increased significantly by 4 trillion won compared to the previous month, while redemption amounts decreased, resulting in a total issuance of 11.4 trillion won.

The OTC bond trading volume in May slightly decreased to 436 trillion won compared to the previous month due to increased volatility caused by the resurgence of COVID-19, and the average daily trading volume decreased by 200 billion won to 22.9 trillion won.

By bond type, government bonds, Monetary Stabilization Bonds, and ABS decreased by 16.4 trillion won, 11.3 trillion won, and 3.8 trillion won respectively compared to the previous month, while corporate bonds increased by 3.2 trillion won.

By investor type, due to financial market instability, bond trading among banks, securities firms, insurance companies, and funds & mutual aid decreased by 14.9 trillion won, 12.3 trillion won, 4.5 trillion won, and 3.6 trillion won respectively compared to the previous month.

Meanwhile, the scale of domestic bonds held by foreigners reached a record high, drawing attention. Although foreign investment in domestic bonds slowed somewhat, due to arbitrage incentives, relatively high yields compared to credit ratings, and expectations of won appreciation, foreigners net purchased 2.6 trillion won in government bonds, 2.4 trillion won in Monetary Stabilization Bonds, and 800 billion won in bank bonds, totaling 5.9 trillion won, bringing their domestic bond holdings to 143.0504 trillion won. This is an increase of 2.2 trillion won compared to the previous month.

Additionally, the issuance amount of CDs in May decreased by 2.11 trillion won compared to the previous month to a total of 2.8 trillion won due to reduced issuance by commercial banks. As of the end of May, the CD rate recorded 0.81%, down 29 basis points from the previous month due to the base rate cut and other factors.

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