Korea to buy back treasury bonds to curb rising interest rates

South Korea plans to buy back 2 trillion won ($1.7 billion) worth of government bonds in a move to stem a jump in market interest rates.

The Ministry of Economy and Finance will also coordinate with the Bank of Korea to stabilize the local bond markets, if necessary, according to a ministry statement on Nov. 2.

“The stable management of the government bond market has become more important than ever to support the fiscal policy’s role in the economy and smooth normalization of the (accommodative) monetary policy,” said Second Vice Finance Minister Ahn Do-Geol in a meeting with major investors.

The plan dragged lower the country’s benchmark bond yield. The most liquid three-year Korean treasury bond yield dipped 7 basis points (bps) to 2.038% from a three-year peak of 2.108% in the previous session. That compared with a record-low of 0.795% touched on Aug. 5, 2020. Domestic bond yields have been rising on expectations of tighter monetary policies at home and abroad amid surging inflation.

“EXCESSIVE RISE”

Such a rise was excessive, said participants of the meeting including the finance ministry officials. The return on the three-year government bond surged 51 bps from Oct. 1 to Oct. 29, while the yield of the US Treasury with the same maturity rose 24 bps during the period. South Korea’s 10-year bond yield also surged 34 bps, far higher than a 7 bps rise in the 10-year US Treasury yield.


South Korea’s bond market is expected to become more volatile if the Federal Reserve announces the US central bank will start scaling back asset purchases after its policy meeting concludes on Nov. 3 as widely expected, according to market participants.

“We plan to implement the buyback program as soon as possible, considering the Fed’s schedule,” said a South Korea’s finance ministry official said.

The ministry already planned to cut its sale of state bonds for November to 8 trillion won from 12.5 trillion won issued in October. The Bank of Korea also said it was set to reduce the sale of monetary stabilization bonds this month.

Write to Eui-Jin Jeong at justin@hankyung.com
Jongwoo Cheon edited this article.