[THE VIEW]Are Government Bonds for Individual Investors Attractive?

3.5 Billion KRW Poured Into 10-Year Bonds,
But 20-Year Bonds Undersubscribed Due to Investment Limits
Early Redemption Results in Interest Loss
Clashes With Efforts to Revitalize the Stock Market

The public offering of government bonds for individual investors, which began for the first time in the middle of this month, has ended. Long-term government bonds with maturities of 10 and 20 years were sold in small amounts to individuals. While the 10-year bonds received subscriptions worth 349.3 billion KRW out of the 100 billion KRW offered, the 20-year bonds only attracted 76.8 billion KRW, resulting in undersubscription. Can this be considered a half-success?

Government bonds for individual investors are attractive because they guarantee stable returns as long as the country does not default. Additionally, there is a premium interest rate if held until maturity, along with tax benefits. They offer a clearer advantage by providing better after-tax returns than most long-term deposit and savings products. Although short-term interest rates can sometimes be higher, if rates are expected to decline, these bonds can be a reasonable long-term investment.

So why did the 20-year bonds remain undersubscribed? The government intended to make individual government bonds a savings-type bond to provide a stable investment option for ordinary citizens to prepare for retirement.

However, individuals seeking stable returns like those from government bonds tend to be high-income earners with financial leeway.

But this time, individual government bonds have an annual purchase limit of 100 million KRW. For investors with financial flexibility, the 100 million KRW limit may make these bonds less appealing. Investments in 10- or 20-year bonds require liquidity due to personal uncertainties, but if not held until maturity, investors suffer significant losses on interest, making these bonds less attractive to ordinary citizens.

The wider range of investment options such as overseas stocks, funds, and cryptocurrencies also makes individual government bonds relatively less attractive. Ordinary individual investors are more likely to pursue options with higher expected returns, even if they involve some risk.

Especially, investment vehicles like ETFs still exist that offer diversification benefits, reducing risk while potentially yielding higher returns than government bonds. Moreover, other investment products generally allow relatively free redemption.

Can the 10-year bonds be considered successful? It is still difficult to conclude definitively, but a more accurate analysis would require knowing how many individuals applied for the 10-year bonds and the distribution of individual subscription amounts. Those who subscribe close to the 100 million KRW limit cannot purchase additional individual government bonds this year. If no new investors enter who did not subscribe this time, subscription amounts may decrease as the year-end approaches. Therefore, it is still cautious to call this a half-success.

Meanwhile, the issuance of individual government bonds somewhat conflicts with efforts to revitalize the stock market. The government is working to boost the Korean stock market, and encouraging long-term investment in stocks is one of its goals. Bonds and stocks are generally substitutes for investors, so government bond products may reduce some individual investors' incentives to invest long-term in the stock market.

Seonggyu Park, Professor at Willamette University, USA