Due to Strong Demand, Five-Year Individual Investor Government Bonds Increased for Three Consecutive Months

1.26 trillion won rushes to this month's 80 billion won offering... Competition ratio hits 1.58 to 1
Ten-year and twenty-year bonds continue long streak of under-subscription

The government will increase the issuance of five-year individual investor government bonds to 90 billion won next month, following three consecutive months of oversubscription and strong demand since their launch.

On May 30, the Ministry of Economy and Finance announced that in June it will issue a total of 140 billion won in individual investor government bonds: 90 billion won in five-year bonds, 40 billion won in ten-year bonds, and 10 billion won in twenty-year bonds. The issuance volume for the five-year bonds has been increased by 10 billion won compared to the previous month, while the volumes for the ten-year and twenty-year bonds remain unchanged.

In addition to the previously issued ten-year and twenty-year bonds, the government began issuing the new five-year short-term bonds in March and has increased the issuance volume for three consecutive months.

The government is expanding only the five-year bond issuance due to concentrated demand for short-term bonds.

This month, the 80 billion won offering for the five-year bonds attracted 126.5 billion won in funds, leading the overall success. The competition ratio reached 1.58 to 1. Due to the oversubscription, 93.3 billion won was allocated to the five-year bonds, exceeding the initial plan of 80 billion won.

In contrast, both the ten-year and twenty-year bonds have continued to see insufficient subscription. For the ten-year bonds, the competition ratio dropped to 0.29 to 1 in September last year, just four months after their introduction, and there have been seven consecutive months of under-subscription through this month (with no issuance in December). The twenty-year bonds have experienced ten consecutive months of under-subscription since their introduction through this month.

Individual investor government bonds are less attractive for investment when interest rates are falling, as they do not offer capital gains from bond price fluctuations. A financial investment industry source explained, "For individual investor government bonds, there is no opportunity to sell at a profit when interest rates fall and bond prices rise, which appears to be driving demand toward short-term bonds."

Meanwhile, the coupon rates for the individual investor government bonds to be issued in June will be based on the winning yields of government bonds with the same maturities issued in May: 2.480% for the five-year, 2.695% for the ten-year, and 2.715% for the twenty-year bonds. The additional interest rates, taking into account market conditions, will be 0.55% for the five-year bonds and 0.485% each for the ten-year and twenty-year bonds.

The effective interest rates upon maturity will be 3.030% for the five-year bonds, 3.180% for the ten-year bonds, and 3.200% for the twenty-year bonds. Accordingly, the pre-tax returns upon maturity are approximately 16% for the five-year bonds (annual average yield of 3.2%), about 37% for the ten-year bonds (annual average yield of 3.7%), and about 88% for the twenty-year bonds (annual average yield of 4.4%).

Individual investor government bonds offer the benefits of the coupon rate, the additional interest rate, and annual compound interest if held to maturity. Interest income on investments up to 200 million won 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. The bonds cannot be traded in the market, and early redemption is only possible after one year of holding.