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Pandemic relief funds

Long-term treasury yields surge on talk of new relief fund

Feb 03, 2021 (Gmt+09:00)

The ruling Democratic Party’s push to hand out "a substantial amount" of new relief money has rattled the South Korean debt market, sending longer-dated bond yields to their highest level in over a year on concerns of a possible surge in new government bond issues to finance the new spending.

The yield on 10-year government bonds spiked 3.5 basis points to 1.803% on Feb. 1, the highest level since touching 1.842% on Nov. 12, 2019, according to the Korea Finance Investment Association. Since dropping to as low as 1.281% on July 30 of last year, it has advanced by 52 basis points.

The 30-year treasury yield shot up to 1.958% on Monday, its highest level in more than 21 months.

Graphics by Jerry Lee


On Tuesday, government bond yields with maturities of 10 to 30 years declined by 3.4 to 4.5 basis points amid market expectations that the central Bank of Korea could buy back some of new government bonds to mitigate their market impact.

Lee Nak-yon, head of the ruling party and ex-prime minister, said in a parliamentary speech on the same day that his party, with a majority in parliament, will draw up a fourth round of the pandemic relief fund in a timely manner, adding that the amount will be sufficient.

His remarks, delivered ahead of April by-elections to choose the mayors of Seoul and Busan, spurred market talk that the size of the new relief fund would exceed the first round’s 14.2 trillion won ($12.8 billion) handed out last year to all citizens.

While Finance Minister Hong Nam-ki publicly opposed Lee’s plan to give out new relief money to all citizens, the ruling party head told a radio program on Wednesday that the government can bear the cost, without elaborating further.

Another round of emergency relief funds will require a new supplementary budget.

SPREAD, CENTRAL BANK’S ROLE

The surging longer-term yields have widened the spread between the yields of 3-year and 10-year treasuries to 80.9 basis points this week, the largest level in nearly 10 years.

Bond yield spreads typically serve as a leading economic indicator. But the recent jump in long-term bond yields was due mainly to supply concerns. Further, the rising bond yields offset the effects of monetary policy, at a time when the Bank of Korea has left the benchmark interest rate at a historic low of 0.5% since May of last year to ease the economic fallout of the global pandemic.

In the announcement of its 2021 monetary policy plan on December 2020, the BOK said: "The Bank will conduct outright purchases of treasury bonds if the volatility of long-term market interest rates heightens due to a mismatch between treasury bond supply and demand.” 

Last year, the central bank purchased 11 trillion won worth of government bonds in response to the rising bond yields, but failed to reverse the market trend.

“We are closely monitoring the treasury market. We are determined to actively react to market volatility,” a BOK official said recently.

The BOK held a combined 24.5 trillion won worth of treasuries, which it had purchased directly from the market, as of the end of November 2020. That is equivalent to 3.3% of the country's outstanding volume of treasuries at that time.

The percentage number is much lower than the US Federal Reserve’s 20%, the Bank of England’s 33% and the Bank of Japan’s 45%, said Korea Investment & Securities analyst Ahn Jae-kyun.

But the BOK’s purchase of treasuries, following new government bond issues, could send a negative signal to markets, coupled with plenty of market liquidity, said market watchers, calling for the central bank's cautious approach to the bond market.

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

Yeonhee Kim edited this article.

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