[Why&Next] Debut of 'Personal Government Bonds' Secures Success... Also Criticized as Playground for the Wealthy

High Interest Rates Spotlight Investment Opportunities Ahead of Issuance
Increasing Inquiries as More Securities Firms Show Interest and Government Considers Raising Issuance Limits

Mirae Asset Securities' Digital Investment Consulting Center has been overwhelmed recently by inquiries from individual investors. This center is responsible for selling the 'Government Bonds for Individual Investors,' which the government will issue for the first time on the 20th of this month. As high interest rates persist, interest in fixed interest income continues, leading to a flood of inquiries about purchasing these 'new government bonds' that offer various interest rate and tax benefits if held until maturity. Experts expect the issuance of government bonds for individual investors to perform well, riding the strong trend of individual bond purchases.

A representative from a major domestic securities firm's PB center said, "Since 2022, when the asset price bubble caused by the pandemic burst, consumer interest in stable returns has grown, leading individuals?from the baby boomer generation approaching retirement to the MZ generation (Millennials + Generation Z) entering society during a low-growth period?to increase their bond purchases indiscriminately. In this market environment, interest in government bonds for individual investors is already intense." According to the Korea Financial Investment Association, individuals have net purchased bonds worth 19.9898 trillion won (as of the 7th of this month) this year, more than five times the amount during the same period two years ago.

As popularity rises, more securities firms are seeking licenses to trade government bonds (sales agency licenses). In particular, financial holding companies are reportedly very interested. A financial investment industry insider said, "After conducting their own demand surveys, securities firms rushed to apply for licenses, making the public bidding held in February very heated," adding, "Besides Mirae Asset Securities, which currently acts as the sole sales agent, more securities firms are seeking approval for additional licenses."

The government is also considering raising the issuance limit for government bonds for individual investors and adding more sales agencies. Starting with a total issuance of 200 billion won this month?100 billion won for 10-year bonds and 100 billion won for 20-year bonds?the plan is to issue a total of 1 trillion won this year. A Ministry of Economy and Finance official said, "We have reached a certain level of practical agreement on increasing the issuance limit for next year," adding, "Once the issuance scale of treasury bonds for next year is finalized, we will consider expanding the issuance scale and increasing the number of sales agencies based on market conditions."

The biggest advantages of government bonds for individual investors are twofold. Unlike general government bonds, whose prices fluctuate with market interest rates and may result in losses if sold prematurely, government bonds for individual investors guarantee the principal. Since the government is unlikely to default, there is no risk of losing principal or interest, making their safety even higher than bank deposits. Additionally, if held until maturity, investors can enjoy benefits such as the nominal interest rate, additional interest rate, and compound interest applied annually. For example, purchasing 100 million won worth of 20-year government bonds for individual investors with an annual yield of 3.540% would yield 108% of the investment amount, or 207.8 million won, after 20 years. This means the current 100 million won will return 207.8 million won in 20 years. Assuming the consumer price index rises by 50% over the past 20 years and this trend continues, the current 100 million won would be equivalent to 150 million won in 2044. The expected profit after adjusting for inflation at maturity would be 57.8 million won.

Tax benefits are also available. Interest income on government bonds for individual investors is subject to separate taxation at 14% up to a purchase amount of 200 million won, so investors do not need to worry about comprehensive financial income taxation. Under the current tax system, if financial income (interest + dividend income) from treasury bonds exceeds 20 million won, it becomes subject to comprehensive financial income taxation, and the amount exceeding 20 million won is combined with other income such as earned income or business income and taxed at progressive rates (6?45%).

The separate taxation benefit of government bonds for individual investors is considered more advantageous for high-income earners in higher tax brackets, thus providing strong investment incentives for them. On the other hand, unlike general government bonds, government bonds for individual investors cannot be traded in the market, which limits liquidity and makes them less attractive to low- and middle-income households struggling with prolonged high interest rates and inflation.

For this reason, there are also predictions that government bonds for individual investors will become a playground for high-net-worth individuals. A domestic securities firm's bond analyst said, "Because these bonds are not circulated in the market, investors who need quick cash cannot liquidate them, so unless they are high-income earners, government bonds for individual investors can be a burden," adding, "Demand will likely come mainly from wealthy individuals in Gangnam and other high-net-worth investors who want stable interest income."