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Bond binge defended by the Finance Ministry

Nov 15,2019
Vice Finance Minister Kim Yong-beom on Thursday appealed for calm as the government plans 60.2 trillion won ($51.4 billion) in deficit-covering bonds next year, arguing that the plan is within the country’s fiscal capacity.

He took aim in particular at the recent rise in bond yields despite the cut in rates last month by the central bank, arguing that the increase was related to a retreat of global uncertainties and had nothing to do with bonds to be issued to cover the record 513.5 trillion won budget in 2020.

Three-year treasury yields rose to 1.51 percent as of Wednesday compared to 1.32 percent on Oct. 16, when the central bank slashed the policy rate by 25 basis points to 1.25 percent.

Treasury yields are generally influenced by monetary policy.

“Korea’s treasury yields are rising in line with global interest rates since hitting lows in mid-August,” said the vice finance minister during a government meeting at the Export-Import Bank of Korea in Yeouido, western Seoul.

“Because of reduced global uncertainties, such as progress in the U.S.-China trade negotiations and lessened concerns of a no-deal Brexit, interest rates that had greatly fallen seem to be normalizing.”

According to the Korea Financial Investment Association, 10-year treasury yields have risen by over 60 basis points, to 1.787 percent as of Wednesday from 1.172 percent on Aug. 16.

“Considering Korea’s bond market, supply-side factors are not of a great concern,” explained Kim, referring to the planned deficit-covering bonds for next year. “This is not an excessive level.”

The Finance Ministry’s proposed issuing of 60.2 trillion won worth of deficit covering bonds next year compares with this year’s 33.8 trillion won worth of such bonds.

Analysts partially agree with the government assessment.

“After [yields] bottomed out in August, expectations of increased bond issuance and easing U.S.-China trade tensions have pushed up rates,” Kim Ji-man, an analyst at Samsung Securities, wrote in a report.

“Due to the government’s efforts to revive the economy, there will be a different direction from the past toward increasing bond issuance even if it weighs on fiscal health,” according to a report DB Financial Investment released Wednesday. “Overall, such concerns are especially negative for long-term bonds.”

The vice finance minister forecast local interest rates will be influenced by global risk factors in the near future, such as the U.S.-China trade dispute and the protests in Hong Kong.

BY CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]