The government has decided to resume normal government bond issuance in the second quarter... a positive sign of foreign capital inflows.

The government has decided to resume normal issuance of government bonds and public bonds in the second quarter. This is based on the recent downward stabilization trend in government bond yields and the assessment that, after being included in the World Government Bond Index (WGBI), foreign capital inflows have been smoother than expected.

On the 22nd, the Ministry of Economy and Finance convened the second meeting of the bond issuance agency consultative mechanism, chaired by the Director of the Treasury Office, Huang Shunguan, and the above policy was set. The government bonds will have their issuance volume for May and June determined within the range of 55% to 60% of the overall first-half issuance target. In addition to government bonds, major public bonds are planned to issue about 60 trillion won more than the original plan. Public bonds are bonds issued by public institutions and others to raise funds, and they have a considerable impact on the government’s fiscal operations and on the supply and demand in financial markets.

Previously, in the first quarter, the government and issuance institutions focused on easing market shocks. This was because they were concerned that, as the inclusion in WGBI approached, if bond supply were concentrated all at once, it could cause instability in interest rates. Therefore, government bonds issued only the lowest level of the first-quarter target of 27% to 30%, namely 27.5%, which is 61.5 trillion won; public bonds other than government bonds also issued about 70 trillion won less than the original plan. By delaying issuance, this measure aimed to give the market time to adapt to the new supply-and-demand environment.

The background for the government’s return to normal issuance this time lies in improved actual fund flows. Foreigners’ net purchases of government bonds, measured on a transaction basis (from the 30th of last month to the 21st of this month), amount to 8.5 trillion won, and measured on a settlement basis (from the 1st to the 21st of this month), amount to 6.4 trillion won. The transaction basis refers to the time when trades are concluded, while the settlement basis refers to the time when actual funds and bond delivery are exchanged; both indicators show that foreign investors’ demand continues. The government judges that this pattern of fund flows can, to a certain extent, absorb supply-and-demand pressure in the government bond market.

However, given that normalizing issuance also means expanding supply, the government decided to remain cautious in the way issuance volumes are allocated. The meeting that day reviewed and adjusted each agency’s plans to ensure that second-quarter bond issuance would not be concentrated in a specific period. In addition, considering that most public bonds are short-term bonds with maturities of less than 3 years, it was decided to increase the proportion of medium- and long-term bonds with maturities of more than 5 years among government bonds in the second quarter. This takes into account that if bonds were concentrated in the short-term segment, it could lead to fluctuations in market interest rates; therefore, the government hopes to reduce supply-and-demand pressure by diversifying the maturity structure. The Director of the Treasury Office, Huang Shunguan, said that since the inflow of WGBI funds has stabilized this month, the bond market has become calmer, but external uncertainties remain. If necessary, issuance volume and timing will be readjusted through meetings convened at any time. This trend may also continue flexibly in the future, depending on the pace of foreign capital inflows, the monetary policies of major countries, and volatility in global financial markets.