66 Trillion KRW Increase in Government Bond Issuance in 3rd Supplementary Budget YoY... "Need for BOK Purchase Signal"

Hana Financial Investment: "No Confirmation of BOK's Purchase Intent... Market Uncertainty Increases"
3rd Supplementary Budget Aftermath, 3-Year and 10-Year Treasury Bonds Surge 4bp and 6bp Respectively
Purchase Likely If Gap Between 10-Year Treasury and Base Rate Widens to 100bp

[Asia Economy Reporter Minji Lee] Hana Financial Investment forecasted on the 5th that although the issuance volume of deficit government bonds is expected to increase due to the formation of the 3rd supplementary budget (supplementary budget), uncertainty in the bond market could rise if the Bank of Korea does not show a strong willingness to actively purchase bonds.

Researcher Miseon Lee of Hana Financial Investment said, “The Bank of Korea hinted that it would actively purchase government bonds if the market became unstable, but since no clear signal has emerged, market uncertainty regarding this has increased. On the day, the yields on 3-year and 10-year treasury bonds surged by 4bp and 6bp respectively, and foreigners net sold 10-year futures by 10,260 contracts, marking the largest scale since March 13.”

On the 3rd, the government formed the 3rd supplementary budget at 35.3 trillion KRW. It plans to cover funds with 10.1 trillion KRW from expenditure restructuring and 1.4 trillion KRW from fund surpluses, and issue 23.8 trillion KRW in deficit government bonds.

Reflecting the deficit government bonds from the 3rd supplementary budget, the total issuance of treasury bonds this year will be 168.2 trillion KRW, an increase of 66.5 trillion KRW compared to the previous year. Assuming the issuance ratio for 30-year and 50-year maturities is 30%, the monthly average issuance will be 4.6 trillion KRW, up 2.2 trillion KRW from the previous year. Assuming the issuance ratios for 10-year, 5-year, and 3-year maturities remain similar to last year, monthly average issuances will be 3.4 trillion KRW, 2.2 trillion KRW, and 2.8 trillion KRW respectively, increasing by 1.2 trillion KRW, 0.7 trillion KRW, and 1.1 trillion KRW compared to the previous year.

Researcher Miseon Lee said, “In the case of ultra-long-term bonds, recently insurance companies have increased net purchases of bonds over 10 years by 50% compared to last year, and considering the foreign exchange hedge premium, the fact that the US 30-year yield is 40bp lower than the Korean 30-year treasury yield indicates demand. However, since the fund, which was the main investor in the 10-year treasury, has switched to net selling, purchases by the Bank of Korea are expected to be necessary.”

If ambiguity regarding government bond purchases continues, the government bond market is expected to face new uncertainties. If no information about bond purchases is released, the central bank’s decision-making itself could become a volatility factor.

However, it is also judged that the Bank of Korea needs to consider the timing and method of bond purchases. Since Korea is a non-reserve currency country, if the central bank purchases a large volume of government bonds, it could be perceived as ‘monetizing debt’ and put downward pressure on the currency.

Researcher Miseon Lee explained, “The Bank of Korea should consider presenting the approximate purchase volume as a range or announcing the purchase timing in advance to reduce uncertainty. Considering the Bank of Korea’s monetary easing intention revealed last month and the need for cooperation with the government, the rationale for purchases will be strengthened if the spread between the 10-year treasury and the base interest rate widens by more than 100bp.”