Deficit Bonds of 104 Trillion Won This Year Alone... Signs of 'Indigestion' in the Bond Market

3-Year Korean Treasury Bond Yield at 0.955%
10-Year Yield at 1.58% Early This Month, Highest in 5 Months
Deficit Bonds Surpass 100 Trillion Won for the First Time This Year

"Supply-Demand Pressure May Push Yields Higher"
Interest Burden Increases Contrary to COVID-19 Support Intent, Risking a Vicious Cycle

[Asia Economy Reporters Eunbyeol Kim and Minji Lee] As the fourth supplementary budget (supplementary budget) in 59 years, aimed at supporting groups hit hard by the novel coronavirus infection (COVID-19), has been officially formulated, the bond market is showing unusual trends. With the announcement of the largest-ever budget for next year, government bond yields have started to rise (bond prices have fallen), and concerns over bond market supply and demand are growing as the fourth supplementary budget is added.

According to the Korea Financial Investment Association's bond information system as of 9:37 a.m. on the 7th, the 3-year government bond yield was trading at 0.955%, up 2.68 basis points (1bp=0.01 percentage point) from the previous trading day (0.929%). This is an increase of 15.6bp compared to early August (0.799%), and on the 1st, it surged to 0.97%, approaching the 1% level. This is the highest level since April, when anxiety due to COVID-19 peaked. At the same time, the 10-year bond was trading at 1.568%. The 10-year bond yield, which fluctuated between 1.3% and 1.4% last month, soared to 1.58% earlier this month, marking the highest level in five months.

Government bond yields move inversely to prices. In other words, the prices of bonds issued by the government to raise funds are falling rapidly. Due to the ongoing COVID-19 situation since the beginning of this year, the issuance volume of government bonds has increased, and as a large amount flooded the market, prices naturally dropped.

Deficit government bonds issued this year alone have already exceeded 100 trillion won. The scale of deficit government bonds, including the third supplementary budget this year, is 97.1 trillion won. The issuance of deficit government bonds, which was 60.3 trillion won based on the original budget, has increased significantly more than expected, and compared to last year's settlement (34.4 trillion won), it has increased about 2.8 times. Assuming the fourth supplementary budget is 7.5 trillion won and all of it is issued as deficit government bonds, the issuance of deficit government bonds this year will increase from 97.1 trillion won to 104.6 trillion won. This is the first time that the issuance of deficit government bonds in a year has exceeded 100 trillion won. There is no other sharp method besides issuing government bonds. Due to the prolonged COVID-19 situation, the government has repeatedly "wrung out a dry towel," so there is no more money that can be made by further reducing spending.

This situation is further increasing market concerns. Jaekyun Ahn, a researcher at Korea Investment & Securities, said, "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." He analyzed, "This means concerns about an increase in government bond supply may continue, and the supply-demand burden in the bond market will raise interest rates further."

The problem is that government bond yields serve as the benchmark for various borrowing rates. If government bond yields rise, borrowing rates and interest costs for companies and households may also increase. The government expanded fiscal spending to support companies and households in response to COVID-19, but ironically, this may result in higher interest rates. A Bank of Korea official said, "Unlike household loans, many corporate loans are variable-rate loans, so when the interest rate cycle returns, loan interest rates may rise, increasing interest burdens." The corporate bond market may also be affected. Sangjae Lee, a researcher at Eugene Investment & Securities, said, "If private sector bond demand is established, not only will the financing environment worsen, but pressure to widen credit spreads will also appear." He diagnosed, "Unless the Bank of Korea actively purchases government bonds to ease supply-demand burdens, the risk of frictional interest rate increases will continue." This explains that the government's expansion of fiscal spending could lead to a "crowding-out effect," increasing interest burdens and suppressing consumption.

It is also a burden for fiscal authorities. They have to borrow money, but interest burdens inevitably increase. If this happens, the national debt-to-GDP ratio will rise further. If GDP contracts this year, the national debt ratio is expected to surpass 45%.

Although it is not yet at a worrisome level, prolonged fiscal deterioration could negatively affect the country's credit rating. International credit rating agencies have recently been paying close attention to fiscal deterioration in emerging countries. If credit ratings show instability, it could lead to foreign currency outflows. While the bond market is looking only to the government and the Bank of Korea, the government and others have so far analyzed that the situation is not yet worrisome. Deputy Prime Minister and Minister of Strategy and Finance Namki Hong repeatedly emphasized during the annual consultation with international credit rating agency Fitch on the 4th, "Despite the COVID-19 situation, Korea's external soundness is being maintained excellently." The Bank of Korea has stated that it will actively purchase government bonds if supply-demand instability appears in the bond market.

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