Korea Treasury Yields Surge Amid Fiscal Expansion Concerns

South Korea's bond market continues to weaken amid growing concerns over government bond supply pressure stemming from the government's expansionary fiscal stance. Analysts note that upward pressure on yields is accumulating as expectations for policy rate cuts have diminished due to the high exchange rate and elevated inflation.

On the Seoul bond market Friday, the yield on three-year Treasury bonds closed at 3.095 percent, up 1.1 basis points from the previous trading day. Five-year and 30-year bonds also rose by 3.4 and 2.6 basis points, closing at 3.336 percent and 3.269 percent, respectively. The three-year yield reached its highest level since mid-July 2024. The upward trend in bond yields persisted despite the Bank of Korea's outright purchase of 1.5 trillion won ($1.1 billion) worth of Treasury bonds on Thursday.

"Uncertainty over the direction of interest rates has increased as concerns about expanded Treasury bond issuance next year overlap with fiscal soundness worries," said Woo Hye-young, a researcher at LS Securities. "Foreign investors are preemptively reducing their positions and moving toward risk aversion as the government's fiscal expansion continues."

The government plans to issue Treasury bonds worth 225.7 trillion won ($164 billion) next year. Net issuance will increase by 25.7 trillion won, from 83.7 trillion won this year to 109.4 trillion won next year. Foreign selling has continued amid supply-demand concerns. Foreign investors' net sales of three-year Treasury bond futures on the Seoul bond market totaled 49,773 contracts in the first nine days of this month, roughly three times the 17,800 contracts sold in the previous month.

Market pressure is likely to intensify starting in the first quarter of next year. Issuance volume tends to concentrate in the first quarter due to the government's practice of front-loading fiscal spending, while the positive effects of Korea's inclusion in the World Government Bond Index will not materialize until the second quarter, meaning supply expansion may be highlighted before any improvement in demand.

"Factors supporting lower yields have virtually disappeared as rate cuts are being delayed and signs of economic recovery become clearer," a bond market official said. "Korea, as a small open economy, cannot avoid the impact as yields in major economies are surging."