The Ministry of Economy and Finance has taken preemptive measures to stabilize bond market supply and demand, including reducing public bond issuance ahead of Korea's inclusion in the World Government Bond Index (WGBI) in April. The move reflects concerns that foreign capital inflows triggered by WGBI inclusion could amplify short-term volatility in interest rates and exchange rates.
The ministry announced on the 25th that it held the first meeting of the "Bond Issuer Council" and decided to reduce bond issuance volume for the first quarter of this year. The meeting was attended by the Financial Services Commission, Financial Supervisory Service, and major issuers including Korea Development Bank, Export-Import Bank of Korea, Industrial Bank of Korea, Korea Electric Power Corporation (KEPCO), Korea Housing Finance Corporation, and Korea Land and Housing Corporation (LH).
Participants coordinated specific issuance timing and March volumes by institution to prevent heightened bond market uncertainty ahead of WGBI inclusion. Treasury bond issuance targets for the first quarter will be maintained, but March issuance will be reduced to minimum levels. Major public bond issuers excluding treasury bonds also agreed to cut total first-quarter issuance by approximately 6 trillion won from initial annual plans, easing concentration of issuance due to corporate bond maturities and reducing overall supply pressure in the bond market. The measure effectively slows public sector issuance in the first quarter to absorb market shocks.
The action reflects the materialization of supply-demand pressures, including recent weakness in public enterprise bonds and widening credit spreads. According to the Korea Financial Investment Association, KEPCO's 3-year bond yield stood at 3.501% as of that day, up 29 basis points from 3.211% at the end of last year.
Markets have observed unusual supply-demand distortions, with some public enterprise bond yields exceeding bank bond yields. Analysts attribute the rapid rate increase to preemptive pricing of concerns over increased issuance supply. Authorities appear mindful of precedents where public enterprise bond supply pressures adversely affected prices, such as the 2022 surge in KEPCO bond issuance and the Legoland crisis.
Observers note that supply pressures are accumulating this first quarter as corporate bond maturities concentrate, increasing refinancing issuance, while expectations grow for expanded local government enterprise bonds and government-guaranteed bond issuance. The government's announcement of preemptive cuts to public bond issuance sends a clear stabilization signal to markets. Some predict the government may also become more cautious about supplementary budget formulation given its active bond market management.
Kim Sang-man, a researcher at Hana Securities, said, "Unlike 2022, we are not in an interest rate hiking cycle, and structural negative factors like the real estate project financing issues that emerged then are limited." However, he added, "Supply-demand pressure centered on public enterprise bonds is recognized as a realistic challenge and is being adversely reflected in prices."
Meanwhile, treasury bond yields fell across the board on the same day. In the Seoul bond market, the 3-year treasury bond yield closed at 3.124% per annum, down 3.4 basis points from the previous trading day. The 10-year yield fell 3.7 basis points to 3.556% per annum.
