The launch of a new three-year maturity retail treasury bond in April has expanded investor options for Korea's retail government bond market. Industry observers expect demand to grow, particularly among investors who found locking up funds for five years or longer too burdensome, as the new product shortens the maturity period by more than two years compared with existing offerings.
According to the financial investment industry on Tuesday, the three-year retail treasury bond launched last month was a successful debut. On the subscription deadline of April 15, the coupon-bearing and compound-interest versions of the three-year bond recorded subscription ratios of 1.03-to-1 and 1.42-to-1, respectively. The compound-interest bond pays both the compounded interest and principal in a lump sum at maturity. The coupon-bearing bond pays regular interest once a year during the holding period and pays the principal along with regular and additional interest at maturity.
The existing five-year, 10-year, and 20-year bonds also sold out completely. The five-year bond drew the strongest demand at 2.37-to-1, while the 10-year and 20-year bonds recorded subscription ratios of 1.63-to-1 and 1.80-to-1, respectively.
With five maturity types of retail treasury bonds now available, the industry expects more investors seeking long-term investment and tax benefits to enter the market.
Retail treasury bonds are savings-type government bonds issued by the government for individual investors. If held to maturity, interest is paid on a compound basis, combining the coupon rate and an additional premium rate. Separate taxation benefits on interest income apply to purchases of up to 200 million won ($146,000). Small-scale investments starting from 100,000 won are also possible. Early redemption is permitted starting one year after issuance (the 13th month), but only interest based on the coupon rate is paid, with compound interest and separate taxation benefits forfeited.
However, some observers note that the success of the three-year bond may depend on the additional premium rate, as this rate affects the pre-tax yield at maturity. For the April issuance of the three-year retail treasury bond, the additional premium rate was 0%. By comparison, the rate was 0.1% for the five-year bond, 1.05% for the 10-year bond, and 1.1% for the 20-year bond. As a result, pre-tax yields at maturity stand at 10.41% (3.47% annual average) for the three-year coupon-bearing bond and 10.77% (3.59% annual average) for the three-year compound-interest bond, while the five-year bond offers 20.7% (4.14% annual average).
