When Will BOK Buy Additional Government Bonds... Market Says "Likely to Save Cards as Much as Possible"

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] Following the announcement of the government's 3rd supplementary budget (supplementary budget) plan, expectations for the Bank of Korea's purchase of government bonds continue in the market. However, the outlook that the Bank of Korea will not easily take action is gaining strength. Since the Bank of Korea has already used various measures, such as lowering the base interest rate to a record low (annual 0.50%) after the COVID-19 pandemic, and the bond market is currently stable, it is judged that there is no need to proactively purchase government bonds unless there are particularly unstable signs in the market.

According to government and market officials on the 13th, the issuance limit of government bonds has significantly increased this year due to the expanded fiscal role in response to COVID-19. Last year's government bond issuance was 101.7 trillion won, and the original budget for this year was set at 130.2 trillion won, but the government's 3rd supplementary budget plan expanded it to 167.8 trillion won. A significant increase in government bond issuance can cause bond prices to fall (bond yields to rise). Therefore, the logic is that the Bank of Korea should purchase government bonds. The Bank of Korea also continues to assert that "if the market is unstable, additional purchases will be made at any time." Bank of Korea Governor Lee Ju-yeol also made remarks in the same context after the Monetary Policy Committee meeting.

The government is also sending similar messages. Yang Choong-mo, Fiscal Management Officer (Deputy Minister) of the Ministry of Economy and Finance, stated at a meeting on the 12th attended by officials from the Ministry of Economy and Finance, investment institutions (KB Securities, NH Investment & Securities, Credit Agricole Bank, Kookmin Bank, Samsung Asset Management, Shinhan Life Insurance), and private experts (Korea Institute of Finance, Capital Market Institute) that "in the event of a sharp rise in interest rates or increased market volatility in the government bond issuance market, we will respond immediately with active market stabilization measures." Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki said on the 29th of last month, "We expect the Bank of Korea to absorb government bonds and handle a significant portion of such volumes," adding, "In that respect, we believe the shock to the government bond market will be considerably mitigated."

However, the market has shown a stable trend so far. On the previous day in the Seoul bond market, the 3-year government bond yield closed at 0.841% per annum, up 0.4 basis points (1bp = 0.01 percentage points) from the previous trading day. The 10-year yield rose 0.5bp to 1.388% per annum. The 5-year and 1-year yields increased by 1.2bp and 0.3bp, closing at 1.125% and 0.721% per annum, respectively.

The 20-year yield rose 1.4bp to 1.529% per annum. The 30-year and 50-year yields increased by 1.9bp and 2.0bp, recording 1.561% and 1.562% per annum, respectively.

After the announcement of the 3rd supplementary budget plan, the 10-year government bond yield temporarily exceeded the 1.40% level, showing an upward trend, but it still remains stable. The U.S. Federal Reserve's announcement to maintain zero interest rates until 2022 is also acting as a favorable momentum for the bond market.

Gong Dong-rak, a researcher at Daishin Securities, said, "The Bank of Korea is unlikely to issue a message about when and how much government bonds it will purchase." He explained, "The moment such information is officially mentioned, the market will move based on the pre-announced information." He added, "Looking at the 10-year government bond yield, it was around 1.52% before the spread of COVID-19, so the Bank of Korea will probably consider additional government bond purchases when the yield reaches around 1.50%."

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