Did Concerns Over National Treasury Bond Issuance Volume... Raise Worries in the Bond Market?

[Asia Economy Reporter Minji Lee] Since the government announced next year's budget plan accompanied by large-scale fiscal spending, the yields on government bonds have been on the rise. An increase in bond yields means a decline in bond prices, which is interpreted as a sharp rise in yields due to reduced demand for government bonds in the market.

According to the Bond Information System of the Korea Financial Investment Association on the 5th, the 3-year government bond yield recorded 0.92%, up 12 basis points (1bp=0.01 percentage point) from early August (0.799%). On the 1st, it surged to 0.97%, approaching the 1% level. This is the highest level since last April, when anxiety over the novel coronavirus disease (COVID-19) peaked. On the same day, the 10-year bond yield, which fluctuated around 1.3% last month, soared to 1.58%, marking the highest level in five months.

The rise in government bond yields this month is influenced by the government's large-scale government bond issuance plan. Government bonds are issued by the government to cover fiscal deficits and finance policy projects, with a total issuance volume of 172.9 trillion won next year. Although deficit bond issuance is 89.7 trillion won, down from 97.8 trillion won this year, the issuance volume in the other sector, expected to include New Deal-related projects, is 20 trillion won, increasing the total government bond issuance by 5.9 trillion won from this year's 167 trillion won. Considering that annual government bond issuance was around 100 trillion won until last year (101 trillion won in 2019, 97 trillion won in 2018), this is the largest scale ever. The expansion of government bond issuance volume has stimulated supply-demand pressure, increasing yield volatility.

Ahn Jaekyun, a researcher at Korea Investment & Securities, analyzed, "Looking at the tax revenue forecasts from 2021 to 2023, they are expected to decrease by an average of 4.6% annually, while fiscal expenditure is expected to increase by an average of 2% annually. This means concerns about an increase in government bond supply may continue, and supply-demand pressure in the bond market will push yields higher."

The Bank of Korea's cautious stance on interest rate cuts and government bond purchases is also a factor dampening bond demand. In a situation where market participants anticipating a decline in bond prices due to large-scale government bond issuance sell bonds in advance to avoid losses, if expectations for interest rate cuts and active government bond purchases disappear, more disappointing sales are expected. When expectations for interest rate cuts strengthen, government bond yields fall. After the Monetary Policy Committee (MPC) of the Bank of Korea held the base rate steady in August, foreigners net sold 91,000 contracts of 3-year bonds and 31,000 contracts of 10-year bonds over six trading days. Although the Bank of Korea purchased 1.5 trillion won worth of 10-year government bonds on the 28th of last month, it was insufficient to stimulate supply-demand.

As discussions on the 4th supplementary budget related to the second round of disaster relief payments gain momentum, yield volatility is expected to expand further for the time being. Market experts forecast that considering the worsening bond investment environment, reliance on the Bank of Korea's active purchases will be inevitable. There are also opinions that if the increase in government bond supply causes contraction effects in the corporate bond market, the overall funding environment will deteriorate. Lee Sangjae, a researcher at Eugene Investment & Securities, stated, "If private sector bond demand is crowded out, not only will the funding environment worsen, but there will also be upward pressure on credit spreads. Without the Bank of Korea's active government bond purchases to ease supply-demand pressure, the risk of frictional yield increases will continue."

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