[Donmaekgyeonghwa] Despite Government Measures, Bond Market Remains Cold... Soaring Interest Rates Increase Government Debt Burden

3-Year Korean Treasury Bond Yield Slightly Rises... Uncertainty Remains Despite 50 Trillion Won Supply Measures

[Asia Economy Sejong=Reporter Kwon Haeyoung] Although the government has decided to supply liquidity to the frozen bond market caused by interest rate hikes and the Legoland default crisis, market sentiment remains cold and the yield on government bonds is still at a high level, which is expected to increase the interest burden on households, companies, and the government alike.

According to the Seoul bond market on the 26th, as of 10 a.m., the yield on 3-year government bonds stood at 4.261%, up 0.04 percentage points from the previous trading day. Although the yield has fallen from the peak of 4.495% (October 21) after the government announced a 50 trillion won liquidity supply measure on the 23rd, it still shows instability at a high level.

An official from the Ministry of Economy and Finance explained, "After the government’s announcement, the anxiety has eased, and the government bond yields, which had been rising to record highs daily, have paused. However, it seems more time is needed for money to circulate in the corporate bond and financial bond markets."

The problem is that if the funding shortage, especially in corporate bonds, does not ease amid the sharply cooled market sentiment, the bond market could experience another shock. The government’s decision yesterday to reduce the issuance volume of government bonds for the remaining two months of this year compared to the original target is also interpreted as a strategy to stabilize the market by reducing government bond issuance. In fact, the credit spread, which is the difference between the 3-year government bond yield and the 3-year AA- rated corporate bond yield, widened from 1.241 percentage points on the 21st before the government’s announcement to 1.307 percentage points on the 25th. The widening gap indicates that the market views corporate bond investment risk as higher.

The soaring yields are also increasing the government’s interest burden on government bonds. Last year, the government set the budget for interest payments on government bonds this year at 20.7 trillion won, expecting the average yield on newly issued government bonds not to exceed 2.6%. However, the average borrowing cost from January to September this year already exceeded the government’s estimate at 3.02%. This means the government’s interest burden on government bonds has increased more than initially expected. The government explains that there is still no major problem in financing interest costs this year. However, as the interest burden on government bonds increases due to rising yields, the government has expanded the budget for interest payments on government bonds next year by 19.8% compared to this year, to 24.8 trillion won. The rise in government bond yields also leads to an increase in household interest burdens, as bank bond yields rise and subsequently mortgage loan rates increase.

An official from the Ministry of Economy and Finance said, "For government bonds newly issued this year, the yields are higher than when the budget was set, so there may be some impact. However, the interest on previously issued bonds has already been fixed, so there is no major problem in financing interest costs this year."

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