South Korea’s plan to issue a record 200 trillion won ($150 billion) in government bonds next year sent shockwaves across the country’s bond market. The announcement surprised market participants who expected the Yoon Suk-yeol administration’s commitment to fiscal austerity to limit bond issuance. The proposed amount exceeds the levels seen during the COVID-19 pandemic, raising concerns that this will significantly burden the market next year.
Yields on 10-year government bonds jumped 10 basis points (1 basis point = 0.01 percentage points), from 2.974% to 3.073%, the day the government announced the proposed budget for 2025 on August 27, according to market data on August 29. Yields on the 3-year, 5-year, 20-year, 30-year and 50-year bonds also rose 5 to 7 basis points on the same day.
A rise in borrowing by the Korean government sent yields higher. The Finance Ministry plans to issue 201.3 trillion won in government bonds next year, a 42.8 trillion won increase from this year’s budget of 158.4 trillion won. Net issuance is set to reach 83.7 trillion won, up 68% compared to this year.
“The market had expected bond issuance to be capped at around 180 trillion won, so the figure came as a shock to the market,” said Ahn Jae-gyun, an analyst at Shinhan Investment & Securities. The market calmed down the next day, with the 10-year bond yield falling by 1.9 basis points to close at 3.054%.
Experts interpret the unexpected surge in government bond issuance as part of the government’s efforts to address tax revenue shortfalls.
To manage tax revenue shortfalls, the government transfers funds from the Public Fund Management Fund to the General Account, which is used for budgeting. This can be achieved by increasing the net issuance of government bonds or transferring surplus funds from other accounts and funds. Last year, the government used surplus Foreign Exchange Equalization Fund funds to bridge the tax revenue gap.
But the government is expected to have fewer resources to draw from next year, which led to an increase in government bond issuance to finance the Public Fund. The amount of funds transferred from the Public Fund to the General Account, also known as deficit financing bonds, is expected to reach 86.7 trillion won next year, most of which will be covered by the net issuance of 83.7 trillion won. This is a considerable increase compared to this year’s budget, where the net issuance accounted for only around 50 trillion won of the total deficit bonds at 81.8 trillion won.
Markets are concerned that the large volume of bonds issued next year could exert further pressure on bond yields. “With 200 trillion won in bonds set to be issued next year, the market is vulnerable to higher yields at the slightest hint of volatility,” said a market insider.
