5-Year Individual Investor Government Bond Loses Steam... Undersubscribed This Month

606 Billion Won Subscribed for 90 Billion Won Offering This Month
10-Year and 20-Year Bonds Continue Long-Term Undersubscription

The Ministry of Economy and Finance will issue a total of 140 billion won in individual investor government bonds in August. The breakdown is 90 billion won for 5-year bonds, 40 billion won for 10-year bonds, and 10 billion won for 20-year bonds. The 5-year bond, which had seen oversubscription for four consecutive months since its launch, will not see an increase in issuance this month due to an undersubscription event.

On July 25, the Ministry of Economy and Finance announced that it would issue a total of 140 billion won in individual investor government bonds in August: 90 billion won for 5-year bonds, 40 billion won for 10-year bonds, and 10 billion won for 20-year bonds. The planned issuance volume is the same as the previous month.

The government, which had previously issued only 10-year and 20-year bonds, began issuing 5-year short-term bonds in March. Due to concentrated demand and four consecutive months of oversubscription, only the 5-year bond had its issuance volume increased.

However, for the first time this month, only about 60.6 billion won was subscribed for the 90 billion won offering of the 5-year bond, resulting in an undersubscription. Both the 10-year and 20-year bonds have also continued to experience persistent undersubscription. For the 10-year bond, the subscription ratio dropped to 0.29 to 1 in September last year, just four months after its introduction, and has been undersubscribed for nine consecutive months up to this month (excluding December, when it was not issued). The 20-year bond has been undersubscribed for 12 consecutive months since its introduction up to this month.

Individual investor government bonds are less attractive in a declining interest rate environment because they do not offer capital gains from bond price fluctuations. A source in the financial investment industry commented, "This appears to be related to the overall slowdown in demand for domestic bond investments among individual investors."

Meanwhile, the coupon rates for the August issuance of individual investor government bonds will be based on the winning yields of the same tenors of treasury bonds issued in July (2.625% for 5-year, 2.835% for 10-year, and 2.805% for 20-year bonds). Additional spreads will be added: 0.405% for 5-year, 0.55% for 10-year, and 0.695% for 20-year bonds.

The yield applied at maturity will be 3.030% for the 5-year bond, 3.385% for the 10-year bond, and 3.500% for the 20-year bond. Accordingly, the pre-tax yield at maturity will be approximately 16% for the 5-year bond (average annual yield of 3.2%), about 40% for the 10-year bond (average annual yield of 4.0%), and about 99% for the 20-year bond (average annual yield of 4.9%).

Individual investor government bonds allow holders to benefit from the coupon rate, additional spread, and annual compound interest if held to maturity. Interest income on purchases up to 200 million won is taxed separately at 14%, so investors do not need to worry about comprehensive financial income taxation. However, to encourage holding to maturity, both principal and interest are paid in a lump sum at maturity. Trading in the market is not allowed, and early redemption is only possible after one year of subscription.

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