Era of 1,000 Trillion Won National Debt... Last Year's 3-Year Government Bond Yield Hits a High of 4.55%

Total Bond Issuance Scale 774.1 Trillion
Opening the Era of 1,000 Trillion Won in Government Bonds

[Asia Economy Reporter Park Soyeon] Last year, the outstanding balance of government bonds exceeded 1,000 trillion won. It was revealed that the domestic bond market interest rates experienced significant fluctuations, with the 3-year government bond yield rising to a maximum of the mid-4.5% range last year.

On the 13th, the Korea Financial Investment Association announced the '2022 Over-the-Counter Bond Market Trends' containing this information. The total net issuance of bonds last year was 130.2 trillion won, with an outstanding balance of 2,592.8 trillion won. Due to the sharp rise in interest rates caused by monetary tightening, issuance of government bonds, corporate bonds, and Monetary Stabilization Bonds (MSBs) significantly decreased, resulting in a bond issuance volume of 774.1 trillion won, down 54.5 trillion won (6.6%) from the previous year.

Among these, government bond issuance recorded 199.7 trillion won, down 28.5 trillion won from the previous year, and the outstanding balance of government bonds exceeded 1,000 trillion won in May last year. MSB issuance decreased by 20.7 trillion won to 104.7 trillion won due to tightening effects.

Financial bonds saw a significant increase in issuance by commercial banks, rising 19.1 trillion won (7.6%) from the previous year to 271.2 trillion won. Corporate bonds experienced a sharp widening of credit spreads due to the rapid rise in interest rates and increased credit risk caused by difficulties in the short-term financial market in the fourth quarter.

As corporate bond investment demand decreased, corporate bond issuance fell by 27.2 trillion won (26.2%) from the previous year to 76.8 trillion won.

Bond yields experienced significant fluctuations. In the first half of last year, factors such as the outbreak of the Ukraine war from the beginning of the year, persistent high inflation leading to policy rate hikes in the U.S., and the Bank of Korea's base rate increases played a central role. In the second half, continued rate hikes due to monetary tightening and financial market instability related to real estate project financing asset-backed commercial paper (PF-ABCP) issuance combined to cause bond yields to rise sharply.

For the 3-year government bond, the yield averaged 0.976% in 2020 and 1.798% in 2021, increasing to an annual average of 3.25% in 2022. On September 26 last year, it peaked at 4.548%.

The amount participating in demand forecasting decreased by 11.1 trillion won from the previous year to 28.4 trillion won, as companies' funding demand declined due to increased financing costs from rising interest rates. The participation rate recorded 230.5%, down 168.3 percentage points (p) from the previous year.

Due to unsold bonds caused by rising interest rates, the unsold rate was 6.5%. Compared to the total confirmed issuance amount of 39.4 trillion won (321 cases) after demand forecasting, 2.6 trillion won (51 cases) remained unsold.

Over-the-counter bond trading volume decreased by 849.7 trillion won (16%) from the previous year to 4,464.5 trillion won due to the sharp rise in interest rates and reduced issuance. The average daily trading volume was 18.1 trillion won, down 3.3 trillion won.

Due to rising interest rates and stock market downturns, individuals showed increased preference for stable high-interest bonds. Individuals net purchased approximately 21.4 trillion won worth of corporate bonds, other financial bonds (including specialized credit finance companies’ bonds), government bonds, and special bonds, an increase of 16.8 trillion won from the previous year.

Due to higher interest rates relative to national credit ratings and incentives for arbitrage, individuals net purchased a total of 71.4 trillion won, including 42.4 trillion won in government bonds, 15.7 trillion won in MSBs, and 11.3 trillion won in bank bonds, although the scale decreased by 48.3 trillion won compared to the previous year.

As of the end of 2022, the outstanding balance of domestic bonds held by foreigners was 228.5 trillion won, an increase of 14.5 trillion won (6.8%) from the end of the previous year.

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