As market rates surge… government launches emergency purchases of 5 trillion won in government bonds

As Korea Treasury bond yields continue to rise, the government will carry out an emergency buyback (purchases for early redemption) worth 5 trillion won. This is the first time the government has conducted a buyback since September 2022. It also decided to include a program to make net redemptions of government bonds when drafting this year’s supplementary budget (extra budget). The move is seen as aimed at stabilizing government bond yields.

The Ministry of Finance and Economy announced on the 26th that it will implement an emergency buyback worth 5 trillion won to stabilize the government bond market. The buyback will proceed through purchases of 2.5 trillion won each on the 27th and April 1.

According to the Korea Financial Investment Association, the yield on the 3-year Korea Treasury bond surged from 2.953% per year at the end of last year to as high as 3.617% per year on the 23rd, jumping 0.664 percentage points in about three months. It closed at 3.558% per year the previous day but remains 1 percentage point above the policy rate (2.5% per year). Following the announcement, the 3-year KTB yield fell to the 3.49% range as of 2:04 p.m.

The government also plans to include net redemptions of KTBs in the supplementary budget to be financed with excess tax revenue this year. Net redemption of government bonds via a supplementary budget will be the first in five years, since 2021. The specific size will be determined during deliberations at the State Council and in the National Assembly. Management of foreign capital inflows will also be strengthened. In line with inclusion in the World Government Bond Index (WGBI) on the 1st of next month, the Ministry of Finance and Economy, the Financial Services Commission, the Bank of Korea, the Financial Supervisory Service, the Korea Securities Depository and others will launch a “WGBI capital inflow standing monitoring task force” to monitor and inspect foreign capital inflows. The plan is to establish a response framework by holding inter-agency meetings as needed during the period of WGBI-tracking inflows to review inflow conditions and devise measures to facilitate inflows.

The recent rise in rates is interpreted as stemming from higher U.S. Treasury yields driven by the war between the United States and Iran. In addition, there is an assessment that expectations that Shin Hyun-song, the nominee for Bank of Korea governor, has a hawkish (monetary-tightening) inclination also affected the uptrend.

By Kim Ik-hwan lovepen@hankyung.com