With South Korea's national tax revenue surging by more than 63 trillion won this year, market attention has turned to how the surplus will be used. Under the National Finance Act, surplus tax revenue can be spent through a supplementary budget in the same year, or used to reduce or redeem government bond issuance. Revenue not used this way is carried over as a settlement surplus (carried over under the National Finance Act), which can then be allocated in order to local subsidy grants and local education subsidy grants, followed by contributions to the public fund redemption fund and then bond redemption. If a bill submitted to the National Assembly to establish a future response fund passes, the money could bypass these steps and go directly into that fund.
On the 30th, when the government announced its revised national tax revenue estimate, the market produced a range of forecasts about how much of this year's planned treasury bond issuance would be cut. Cho Yong-gu, a senior researcher at Shinyoung Securities, said conditions allow for a reduction of at least 10 trillion won and as much as 12 trillion to 13 trillion won over the remaining period. "At a minimum, they need to cut about 10 trillion won for the market to see it as a meaningful step," he said. A bond official at one securities firm said the market would respond even more positively if the government lowered the share of maturities of five years or longer along with the overall reduction.
How much the government can actually cut issuance over the remaining three months can be gauged from the pace of issuance so far. Cumulative treasury bond issuance from January through September stood at 179.7 trillion won, or 79.6% of the annual plan of 225.7 trillion won. That is 5.9 percentage points below the five-year average completion rate of 85.5% at the same point and 6.4 percentage points below the three-year average of 86.0%. If the government uses part of the 63.2 trillion won in surplus revenue to trim issuance planned for this year, the reduced supply of treasury bonds could ease upward pressure on yields from the supply-demand side.
Treasury yields fell for now. At 9:30 a.m., after news of the issuance reduction emerged, the three-year yield dropped to 4.023%, down 0.053 percentage points from the previous close, and the 10-year yield fell 0.039 percentage points to 4.437%. The three-year yield declined further to close at 4.011%. The 10-year yield ended the session at 4.407%.
Because the government has also left open the possibility of an emergency buyback, reduced new issuance could be paired with additional supply-demand stabilization measures. A buyback normally involves purchasing government bonds before maturity and reissuing them as needed to adjust maturities and the timing of supply, but this time the government is also said to be considering cutting subsequent issuance by the amount bought back. A senior government official said that reissuing the same amount after a buyback merely adjusts timing, while not reissuing it would have the effect of reducing the annual supply of treasury bonds itself.
The market has responded positively to the government's stabilization measures. Yoon Yeo-sam, a research fellow at Meritz Securities, said the bond side needs to absorb supply-demand pressure because issuance conditions for bank debentures and public corporate bonds are also poor. "With global rates unsettled, there would also be a symbolic effect in showing fiscal capacity," he said.
Lee Hyoung-il, Deputy Prime Minister and Minister of Economy and Finance, said domestic bond yields are continuing to rise as global rate increases driven by higher oil prices and a shift toward monetary tightening in major economies combine with domestic factors. "We will closely monitor trends in the treasury bond market and implement the market stabilization measures that are needed," he said.
