Fiscal Pressure Mounts Amid Surging U.S. Treasury Yields...Exceeds Supplementary Budget Estimate by 0.04%p

Rising Treasury Bond Procurement Rates

A 0.1 Percentage Point Increase in Yields

Means Interest Payments Jump by 220 Billion Won

As domestic bond yields soar due to the impact of high yields on U.S. Treasury bonds, the government's interest payment burden on Korean Treasury Bonds (KTBs) is also increasing. The average funding rate for KTBs has surged from 2.66% last year to 3.44% this year, further intensifying fiscal pressure. If this situation—where the KTB funding rate significantly exceeds the government’s target of 3.4%—continues, there is a possibility that additional resources will be needed for interest payments.

According to the Ministry of Economy and Finance and other relevant agencies on May 18, the actual average funding rate for KTBs issued last month reached 3.60%. This figure exceeds the government’s projection of 3.40% for newly issued KTBs, as set in the first supplementary budget, by 0.2 percentage points.

Last year, when drafting this year’s budget, the government set the average funding rate for newly issued KTBs at 3.0% and allocated 3.44221 trillion won for KTB interest payments (including retail government bonds). At that time, the average funding rate was in the mid-2% range, lower than the government’s forecast. However, since the end of last year, the average KTB funding rate has shown a clear upward trend. In October last year, the funding rate was around 2.68%, but it rose to 3.01% in November, entering the 3% range, and the increase accelerated to 3.15% in December.

This year, the average funding rate stood at the low 3% range in January (3.18%), but climbed to the mid-3% range in February (3.40%) and March (3.50%), especially around the time of the Middle East war. During this period, the increase amounted to 0.82 percentage points. Reflecting this clear upward trend, the government raised the interest rate assumption for this year’s first supplementary budget by 0.4 percentage points to 3.4%, and increased the associated interest payment budget by 106.6 billion won.

Average Funding Rate at 3.44%...Exceeding Government’s Supplementary Budget Projection

However, as inflation concerns due to the prolonged Middle East war accumulate, panic has spread throughout the global bond market, and last month the average funding rate already soared to 3.60%, 0.2 percentage points above the government’s supplementary budget projection (3.4%). Since February, the average KTB funding rate has exceeded the government’s projection every month. As of the cumulative figure for April this year, it stands at 3.44%, which is 0.04 percentage points higher than the government’s interest rate assumption for the budget.

As KTB yields rise, fiscal pressure is also mounting. Given that the budgeted interest rate this year is 3.4%, there are growing concerns that the 3.44221 trillion won allocated for KTB interest payments may be insufficient, even accounting for the semiannual interest payment schedule. If the government’s KTB issuance ceiling this year is considered, a mere 0.1 percentage point increase in the funding rate would add 220.5 billion won in interest costs. A bond market source noted, “Long-term yields are also well above the budgeted interest rate, so the actual increase in interest payments could exceed even the amount allocated in the supplementary budget.”

The high-yield environment approaching 4% is expected to persist unless the upward trend in U.S. Treasury yields abates. Recently, the yield on the 10-year U.S. Treasury reached 4.595% on May 15, marking a 15-month high, while the 30-year U.S. Treasury yield soared to 5.128% on the same day—the highest since just before the 2007 global financial crisis. As the world is swept up in a U.S.-driven bond market shock, expectations are growing that the U.S. Federal Reserve and other central banks will continue to raise benchmark interest rates. This, in turn, is pushing up the likelihood that the Bank of Korea will hike its own policy rate within the year, further fueling KTB yields. On this day, the yield on the 3-year KTB in the Seoul bond market rose to 3.7%, while the 10-year and 20-year yields climbed to the 4.2% range. The 10-year yield is now at its highest level since November 1, 2023 (4.288%), when interest rates peaked in the wake of the pandemic.

10-Year Yield in the 4.2% Range...Highest Since 2023

As market interest rates reach new highs, the issuance yield—which moves in tandem—is also expected to see a larger increase from May onward. This year, the total planned issuance of KTBs (excluding retail government bonds) is 223.7 trillion won, of which 84.1 trillion won (about 37%) had been issued by the end of April. The remaining issuance for this year amounts to 139.6 trillion won, with approximately 19 trillion won scheduled for new issuance in May. As the annual cap for KTB issuance this year is at a record high, the government's conditions for securing KTB funding are likely to worsen further. Yuminho, budget analyst at the National Assembly Budget Office, commented, “It is difficult to rule out the possibility that both domestic and international economic conditions could exert additional upward pressure on KTB yields. On an annual basis, we must also consider the possibility that the average KTB funding rate could rise to the 2023 level of 3.57%, which was the highest in the past 10 years.”

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