Fears Grow Over $209 Billion Korea Bond Deluge as Samsung, SK Hynix Emerge as Potential Buyers

South Korea’s bond market is poised to absorb nearly 290 trillion won ($210 billion) of sovereign and government-guaranteed debt next year, raising concerns about a market cash squeeze. The combined supply would be more than 20 trillion won higher than this year, and further rate increases by the Bank of Korea could add to the strain. Expectations are also growing that a new Future Response Fund, along with cash-rich Samsung Electronics Co. and SK Hynix Inc., could help absorb the coming wave of issuance.

According to a national debt management plan and related documents the government submitted to the National Assembly on Sept. 14, the combined total of sovereign bond issuance, excluding foreign exchange stabilization bonds, and domestic government-guaranteed debt, excluding guarantee ceilings and Korea-US strategic investment bonds, will rise to 287.7 trillion won ($208.5 billion) next year from 267.5 trillion won ($194 billion) this year. That is an increase of 20.2 trillion won ($14.6 billion), or 7.6%.

Issuance of sovereign debt excluding foreign exchange stabilization bonds, including 222.8 trillion won ($161.4 billion) of Treasury bonds and 15.3 trillion won ($11.1 billion) of national housing bonds, is set at 238.1 trillion won ($172.5 billion). That is down 1.7 trillion won ($1.2 billion) from 239.8 trillion won ($173.7 billion) this year.

Government-guaranteed debt, which is widely treated in the market as equivalent to sovereign debt, will increase to 49.6 trillion won ($35.9 billion) next year from 27.7 trillion won ($20.1 billion) this year, based on guarantee limits. Guaranteed liabilities tied to advanced strategic industry fund bonds will rise to 21.5 trillion won ($15.6 billion) from 6.4 trillion won ($4.6 billion). Supply chain stabilization fund bonds will increase to 15.7 trillion won ($11.4 billion) from 9.7 trillion won ($7 billion), while Korea Student Aid Foundation bonds will climb to 12.4 trillion won ($9 billion) from 11.6 trillion won ($8.4 billion). Those figures represent the amount of bonds that can be issued against the guarantees. Actual new government-guaranteed issuance may differ depending on redemptions and project execution.

The prospect is stoking concern about a supply shock in the sovereign bond market. The yield on three-year Korean Treasury bonds rose to 4.014% on Sept. 11, topping 4% for the first time since November 2023. Back-to-back Bank of Korea rate increases and the burden of heavy sovereign issuance are both pushing yields higher.

If demand for sovereign bonds weakens, the impact could spread across the broader debt market. Sovereign and government-guaranteed debt can soak up investment demand from banks, insurers and pension funds.

The bond market is also focused on the Future Response Fund, which is due to launch next year. The fund is projected to accumulate more than 100 trillion won ($72.5 billion) in idle cash. The government has not finalized a detailed asset-allocation plan, but the fund’s emphasis on safety and liquidity is fueling expectations that a sizable share could flow into sovereign bonds.

Kim Myung-sil, an analyst at iM Securities, estimated the fund’s average assets under management next year at about 73.1 trillion won ($53 billion), reflecting the phased inflow of additional tax revenue. Assuming 35% is invested in Korean Treasury bonds, that would create roughly 25 trillion won to 26 trillion won ($18.1 billion to $18.8 billion) in buying demand, Kim wrote.

At 25 trillion won ($18.1 billion), that would amount to more than 11% of next year’s total Treasury issuance of 222.8 trillion won ($161.4 billion). That helps explain why some investors see the fund as a new source of demand for sovereign debt.

Samsung Electronics and SK Hynix are also being cited as potential heavyweight buyers of Korean Treasury bonds. The companies are seeking stable places to park cash accumulated during the semiconductor boom. Even after setting aside funds for large capital spending plans, they still need to manage short-term surplus cash, prompting market speculation that they could buy sovereign debt because of its low credit risk and high liquidity.

Still, some question whether it is efficient for the government to issue Treasury bonds at yields of around 4% while using the Future Response Fund to buy them back. If a large share of the fund’s idle cash is directed into sovereign bonds, cutting new issuance from the outset or using the money to repay existing government debt could be a better way to reduce the government’s overall interest burden.

Kim Ik-hwan, Hankyung.com reporter lovepen@hankyung.com