South Korean 30-year government bond yields recently climbed to the 4.4% level, causing the ultra-long yield curve to continue steepening. The spread between 30-year and 10-year Korean Treasury Bonds (KTBs) stood at 20.7 basis points as of the previous trading day, according to Yonhap Infomax bond and interest rate evaluation matrix data. The steepening reflects weak insurance company demand for 30-year bonds and World Government Bond Index (WGBI)-related capital flowing primarily into shorter maturities rather than ultra-long bonds. The government's recent emphasis on utilizing 'additional tax revenue' rather than 'excess tax revenue' through a new Future Response Fund adds supply pressure. Market participants expect this trend to persist given current domestic and international conditions, including volatility in Japanese long-term bond yields which rose over 20 basis points for 20-year and 30-year maturities last week.
Foreign Investors Purchase 10 Trillion Won in Shorter-Maturity Bonds
The yield curve inversion fully resolved approximately one month ago, with the spread maintaining around 20 basis points since the 26th of last month. From April through a three-month period, foreign investors purchased over 10 trillion won in 5-year and 10-year KTBs, three times the net purchase amount of 30-year bonds. WGBI-related fund inflows directed toward 30-year bonds fell short of market expectations, contributing to weaker demand for ultra-long maturities.
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Government Announces Future Response Fund Using Additional Tax Revenue
Kang Hoon-sik, Chief of Staff at the Blue House, stated at a high-level party-government consultation meeting over the weekend that "the government will pursue the establishment of a Future Response Fund to utilize additional tax revenue as investment resources for future generations." The government's focus on 'additional tax revenue' rather than 'excess tax revenue' creates an unfavorable environment for 30-year bonds. Under the National Finance Act, excess tax revenue must be used primarily for local allocation tax and education finance grants settlement, public fund repayment, and government bond redemption. The emphasis on additional tax revenue suggests active utilization with fewer usage constraints, raising concerns that next year's government bond issuance volume may not decrease as much as the market expects when announced at the end of next month.
Market Participants Debate Issuance Guideline Adjustment
Japanese long-term bond yields significantly increased their levels from the end of last month, with 10-year bonds rising over 17 basis points and 20-year and 30-year bonds climbing over 20 basis points last week. The increase resulted from supply pressure on ultra-long bonds due to the Japanese government's aggressive fiscal expansion stance, similar to South Korea's situation.
Some market participants suggest adjusting the issuance ratio of 30-year bonds. According to annual guidance, bonds with maturities over 20 years account for 35%±5% of total government bond issuance, with this month's issuance occurring at the lower end of that range. One bond market participant stated, "There was an expectation that passive funds would actively purchase ultra-long bonds due to WGBI inclusion this year, but in reality they are buying mainly benchmark and off-benchmark 5-year and 10-year bonds. If this unexpected situation continues, special measures such as issuance ratio adjustment may be necessary."
Lim Jae-kyun, researcher at KB Securities, explained, "For the short-term weakness in 30-year bonds to slow, a reduction in the guideline ratio for long-term bonds is necessary. The volume of 30-year bonds that must be issued in the remaining period averages around the mid-3 trillion won level, and considering that 30-year bonds showed weakness even after reducing 3 trillion won in June-July, further weakness in 30-year bonds may appear."
However, some argue that if the government actually adjusts the guideline, concerns about demand for 30-year bonds could intensify further. One bond market official stated, "If the government adjusts the issuance ratio guideline in the current situation, it could rather amplify doubts about demand for 30-year bonds." Another bond market participant mentioned, "Now it is a matter of whether the government is significantly uncomfortable with the curve steepening trend or not. The trend does not seem likely to change significantly for the time being."
FAQ
What caused South Korean 30-year bond yields to rise to 4.4%?
The rise resulted from weak insurance company demand for 30-year bonds, WGBI-related funds flowing primarily into 5-year and 10-year bonds rather than ultra-long maturities, and the government's policy focus on utilizing additional tax revenue through a new Future Response Fund rather than prioritizing debt repayment.
How much did foreign investors buy in shorter-maturity Korean government bonds?
From April through a three-month period, foreign investors purchased over 10 trillion won in 5-year and 10-year Korean Treasury Bonds, which is three times the net purchase amount of 30-year bonds during the same period.
What is the current issuance guideline for long-term Korean government bonds?
According to annual guidance, bonds with maturities over 20 years account for 35%±5% of total government bond issuance. This month's issuance occurred at the lower end of that range.
