The government will increase the issuance of five-year individual investor government bonds to 80 billion KRW next month, following their strong performance since launch. This decision comes as the bonds have been oversubscribed for two consecutive months, breaking the long-standing slump in long-term bonds.
On April 25, the Ministry of Economy and Finance announced that it will issue a total of 130 billion KRW in individual investor government bonds in May: 80 billion KRW in five-year bonds, 40 billion KRW in ten-year bonds, and 10 billion KRW in twenty-year bonds.
The five-year issuance will be increased by 10 billion KRW compared to the previous month, while the ten-year and twenty-year bonds will remain at similar levels as before.
Since March, the government has been issuing new five-year short-term bonds in addition to the previously issued ten-year and twenty-year bonds, and has increased the issuance volume for two consecutive months. The government is expanding only the five-year issuance due to the high demand for short-term bonds.
This month, the subscription competition ratio for the five-year bonds reached 1.5 to 1. Due to oversubscription, 91.2 billion KRW was allocated to the five-year bonds, exceeding the original plan of 70 billion KRW. In contrast, both the ten-year and twenty-year bonds have continued to see under-subscription. For the ten-year bonds, the competition ratio dropped to 0.29 to 1 in September 2024, just four months after their introduction, and under-subscription has continued for six consecutive months through this month (with no issuance in December). The twenty-year bonds have been under-subscribed for nine consecutive months since their introduction through this month.
Individual investor government bonds are considered less attractive during periods of falling interest rates, as they do not offer capital gains from price fluctuations. A financial investment industry official stated, "Individual investor government bonds are less attractive in a falling interest rate environment because investors cannot sell them at a profit when bond prices rise. Going forward, the level of the additional interest rate will be the key to their popularity."
Meanwhile, the coupon rates for the May issuance of individual investor government bonds will be based on the winning yields of government bonds with the same maturities issued in April (2.440% for five-year, 2.700% for ten-year, and 2.560% for twenty-year bonds). The additional interest rates, considering market conditions, will be set at 0.59% for five-year bonds, 0.48% for ten-year bonds, and 0.64% for twenty-year bonds. The yield to maturity will be 3.030% for five-year bonds, 3.180% for ten-year bonds, and 3.200% for twenty-year bonds.
Accordingly, the pre-tax yield to maturity will be approximately 16% for five-year bonds (an average annual yield of 3.2%), about 37% for ten-year bonds (an average annual yield of 3.7%), and about 88% for twenty-year bonds (an average annual yield of 4.4%).
Individual investor government bonds offer the benefits of the coupon rate, additional interest rate, and annual compound interest if held to maturity. Interest income up to 200 million KRW in purchase amount is taxed separately at 14%, so investors do not need to worry about comprehensive financial income taxation. However, to encourage holding until 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 from subscription.
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