Invest3 publishers2 min readPublished
Seoul shrinks bond supply by 8.5 trillion won as US 10-year yields hit their highest since 2002
South Korea cut October Treasury bond issuance by 5 trillion won and plans 3.5 trillion won of buybacks as US 10-year yields hit their highest since 2002. Both steps manage supply, so the level of won yields still depends on what US Treasuries do next.
The Investor · Invest desk
What happened
- Finance Minister Lee Hyoung-il said on Friday the government would consider reducing issuance further if necessary, at his first market meeting since taking office.
- The planned buybacks cover two-, three-, five- and 10-year Treasury bonds already in circulation.
- Lee said the Korean three-year Treasury yield has risen above 4.0 percent, and that credit spreads have widened this year.
- The US 10-year Treasury yield touched 5.338 percent in intraday trading on Thursday.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- decision Rates desks have to size any Seoul backstop from a conditional finance-ministry pledge alone, because the Bank of Korea's position on bond purchases has not been reported.
- constraint Until the ministry says whether October's 5 trillion won is cancelled or deferred, desks cannot count it as a permanent reduction in this year's supply.
- cost Any emergency buybacks would spend Korean government money against a rise in yields that started in the US market and that Seoul's auctions do not drive.
Together, the issuance cut and the buybacks leave investors 8.5 trillion won less Korean government paper to absorb than the original plan implied [1]. In a buyback the government bids for its own bonds, and in the JoongAng Daily's description that adds demand and eases upward pressure on yields [10]. Both steps act on quantity. The rise in yields came from abroad, led by the United States [13], and a thinner Korean auction calendar does not change what an investor earns by holding US Treasuries instead [5].
The reports do not give the size of the original October plan or say whether the 5 trillion won is cancelled or only deferred. They also do not quote Bank of Korea Governor Shin Hyun-song, who attended Friday's meeting [9]. So the only backstop on offer comes from the finance ministry. Lee said it would "work closely with relevant agencies to take market stabilization measures, including emergency buybacks, depending on market conditions" [4].
Issuing less in October means the Treasury pays for that month's spending out of cash or borrows the money later, unless spending falls [1]. Emergency buybacks need funding too.
There are three ways this could go. US yields could retreat from Thursday's intraday high [5], letting the Korean three-year slip back under 4.0 percent [6], and the October cut would get credit for a turn it happened to coincide with. Or US yields keep climbing, Seoul carries out the emergency buybacks [4], and it spends money supporting a price set in another market. The third possibility is that the 5 trillion won turns out to be a deferral [1], and the relief reverses once that paper reaches auction.
I think the steps take some pressure off Korean yields while their level keeps following US Treasuries. I would be proved wrong if the Korean three-year yield fell back below 4.0 percent while the US 10-year stayed above 5.3 percent [5][6]. That would mean Seoul's supply management was setting the level after all.
If the policy floor turns out to be soft, corporate borrowers carry the cost. "If high interest rates persist, businesses with lower credit ratings could face greater refinancing burdens," Lee said [8].
Lee has also widened the meeting. Land Minister Hong Jee-sun joined the four finance officials known as the F4 on Friday [9], and Lee said he wants it to review "the macroeconomy and the financial, foreign exchange and real estate markets within a single framework" [12].
What to watch
- The ministry's November issuance plan, which will show whether October's 5 trillion won was cancelled or moved into later auctions.
- Whether the Korean three-year yield falls back below 4.0 percent while the US 10-year stays above 5.3 percent.
- The won-internationalization deregulation Lee promised to announce soon, and whether it changes foreign demand for won bonds.