"Different from the 'Shin Jae-min Incident' Buyback Cancellation... 'Limited Market Impact Even if Downscaled'"

With Bond Yields Falling,
Whether Additional Deficit Bonds Will Be Issued Is Crucial

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Despite reducing the scale of early redemption of government bonds, it is expected that there will be little impact on the market considering the current decline in bond yields. Attention is focused on whether the government's planned redemption amount of 2 trillion won will be affected as the ruling and opposition parties are reviewing increases and other adjustments to the second supplementary budget (supplementary budget) for this year.

Lee Miseon, a researcher at Hana Financial Investment, said on the 21st, "Since the amount to be redeemed is not large, the market shock will not be significant," adding, "Uncertainty regarding the issuance of deficit-covering bonds is a key factor influencing expectations of interest rate increases." She further stated, "It seems more important whether additional deficit-covering bonds will be issued as the total supplementary budget increases, rather than whether government bonds are redeemed."

This outlook gains credibility in light of the recent decline in bond yields. Although government bond yields surged last month, they have been falling this month due to factors such as the Delta variant and a slowdown in economic recovery. As purchases of government bonds, considered safe assets, have increased, yields have dropped. As of 9:15 a.m. today, the yield on 3-year government bonds stood at 1.408%, down 0.2 basis points (1bp=0.01%) from the previous day's close. This is weaker compared to 1.448% at the end of June. The 10-year government bond yield also showed a slight decline at 1.891% today compared to the previous day.

Ministry of Economy and Finance: Must Reduce Absolute Size of National Debt... Determined to Maintain 2 Trillion Won Buyback

However, the Ministry of Economy and Finance, the fiscal authority, is determined to maintain the 2 trillion won government bond redemption to reduce the absolute size of the national debt and enhance external credibility.

A senior government official said, "We are pushing the supplementary budget with the goal of utilizing 2 trillion won for government bond redemption," adding, "It is completely unpredictable how the market will react if this is reduced or canceled." Meanwhile, demands for increases in the supplementary budget are expected to intensify, considering the limited impact on the government bond market. A government official stated, "While the impact on the government bond market is important, the declarative significance of reducing debt is also very important."

On November 14, 2017, the Ministry of Economy and Finance suddenly canceled the buyback, triggering the 'Shin Jae-min incident.' At that time, Kim Dong-yeon, Deputy Prime Minister and Minister of Economy and Finance, said, "There is a possibility that this year's national tax revenue will exceed 260 trillion won," and "The excess tax revenue of about 6 trillion won is due to temporary factors, and we plan to use it broadly, including early redemption of government bonds."

However, the market yields surged sharply when the buyback was canceled without prior notice a day before implementation. The 3-year government bond yield, which had been moving around 2.1%, rose from 2.180% on the 13th to 2.211% on the 14th, an increase of 0.031 percentage points. This was the first time in three years since 2014 that it surpassed the 2.2% level. The 10-year government bond yield also jumped from 2.583% on the 13th to 2.610% on the 14th.

Regarding this, the fiscal authorities view the current situation as different from the past. The Ministry of Economy and Finance explains that since the supplementary budget can be changed, the situation differs from when issuance was officially announced.

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