BOK to buy $4.2 bn in state bonds by year-end to stabilize debt market

The Bank of Korea will buy state bonds worth 5 trillion won ($4.2 billion) directly from the market by the end of this year to stabilize the local debt market.

The central bank said in a statement on September 8 that the move is an attempt to ease market jitters and address the recent sharp rise in bond yields triggered by expectations of further government bond issues.

Yield curves on government bonds have steepened in recent weeks as institutional investors unloaded their bond holdings in anticipation of more government-issued treasuries to finance budget increases aimed at cushioning the fallout from the COVID-19 pandemic.

The finance ministry is expected to submit a supplementary budget worth more than 7 trillion won to the National Assembly soon to provide support for those hit hardest by the virus outbreak. The ministry also plans to increase next year’s budget by 8.5% to 555.8 trillion won.

According to the Korea Financial Investment Association, the yield on the 10-year government bond rose to 1.56% on Tuesday, compared to a yearly low of 1.28% in July. The yield on the 3-year note finished at 0.95% on Tuesday, compared to the record low of 0.795% on August. 5.

“In addition to these state bond purchases, we will take further market stabilization measures if the debt market turns volatile,” said a BOK official.

The central bank has purchased 6 trillion won worth of state bonds directly from the market so far this year.

Write to Ik-Hwan Kim at lovepen@hankyung.com