After the 3rd Supplementary Budget, All Eyes on the Bank of Korea

[Asia Economy Reporter Minji Lee] The role of the Bank of Korea is gaining attention following the government's formulation of the third supplementary budget (supplementary budget). The increase in deficit bond issuance due to the execution of the supplementary budget amounts to 38 trillion won, creating a significant supply and demand burden, leading to the judgment that the Bank of Korea should actively engage in bond purchases.

On the 8th, the financial investment industry expects that smooth absorption of government bonds will be impossible following the announcement of the third supplementary budget, and the market anticipates that the Bank of Korea will soon present a concrete plan for government bond purchases.

Prime Minister Chung Sye-kyun (left) and Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki are attending an extraordinary Cabinet meeting held at the Government Complex Seoul in Jongno-gu, Seoul, on the 3rd. At the Cabinet meeting, the third supplementary budget bill was approved to overcome the economic crisis caused by the novel coronavirus disease (COVID-19) and prepare for the post-COVID-19 era. Photo by Kim Hyun-min kimhyun81@

On the 3rd, the government formulated the largest single supplementary budget in history at 35.3 trillion won. The amount of deficit bond issuance, which attracted significant market interest, was decided at 23.8 trillion won (about 68% of the total). The remaining 10.1 trillion won will be covered by intensive expenditure restructuring, and 1.4 trillion won will be covered by fund surpluses.

Thus, the total increase in deficit bond issuance due to the execution of this year's supplementary budget, including the first (10.3 trillion won) and second (3.6 trillion won) supplementary budgets, amounts to 37.7 trillion won. Considering the planned issuance of 60 trillion won in deficit bonds in this year's budget, it is estimated that nearly 100 trillion won in deficit bonds will be issued this year.

Gu Hyeyoung, a researcher at Mirae Asset Daewoo, said, "The Ministry of Economy and Finance's forecast for the increase rate of government bond issuance balance is close to 20% annually," adding, "The proportion of deficit bonds to total government bond issuance (168 trillion won) will exceed 70%, so the issuance burden due to the third supplementary budget will be perceived as quite high."

Already, following the announcement of the third supplementary budget, yields on 3-year and 10-year government bonds have surged. As of the 5th, the 10-year government bond yield was 1.452%, up 0.074 percentage points from 1.378% the day before the announcement. The 3-year government bond yield also rose 0.043 percentage points to 0.894%.

Kim Jiyoung, a researcher at Shinhan Financial Investment, said, "After the supplementary budget size was confirmed, the 10-year government bond yield exceeded 1.4%," adding, "With the issuance of fund bonds up to 40 trillion won scheduled this month, if the Bank of Korea does not actively purchase, further volatility in market interest rates is inevitable."

The market agrees that the Bank of Korea is likely to focus purchases mainly on 10-year bonds. The threshold is expected to be around 1.45?1.5%. Lee Miseon, a researcher at Hana Financial Investment, said, "In the case of ultra-long-term bonds, recently insurance companies increased net purchases of bonds over 10 years by 50% compared to last year, and considering the foreign exchange hedge premium, the US 30-year yield is 40 basis points lower than the 30-year government bond yield, indicating demand," adding, "However, since the fund, which was an investor in the 10-year government bond, has switched to net selling, the Bank of Korea's purchase is expected to be necessary."

Regarding the purchase scale, it is expected that purchases will be made around 10 trillion won. An Yeha, a researcher at Kiwoom Securities, explained, "In 2008, the Bank of Korea's holdings relative to the government bond balance were about 4.7%, while currently, as of March, it is about 2.7%," adding, "Assuming an expansion to 4.7%, purchases could be increased to over 10 trillion won."

Kim Sanghoon, a researcher at Hi Investment & Securities, said, "Considering the size of the Bank of Korea's government bond purchases in 2006 relative to the government bond issuance balance and the Bank of Korea's total assets, there is additional purchasing capacity of up to 10 trillion won this year," and predicted, "It is expected that purchase support will be provided for the temporarily increased average size of 10-year bonds in the third quarter, totaling 7.5 trillion won, including 2.5 trillion won monthly."

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