The Republic of Korea's (Korea) government bond yield curve—from 2 year maturities to the longer-end of the curve—steepened significantly in June compared to the end of December 2008. The rise in yields over the middle to long end of the curve reflected a number of different trends, including recovery of the Korean stock market and concerns over continued bond issuance by the Korean government, government-owned corporations, and financial institutions in both Korean won and United States (US) dollars.

The Korean economy contracted 2.2% year-on-year (y-o-y) in 2Q09. While GDP growth remained in negative territory, signs of economic recovery are beginnin to show.

The local currency (LCY) bond market in Korea recovered in 2Q09. The bond market rose 5.3% quarter-on-quarter (on an LCY basis) in June. On a year-on-year (y-o-y) basis, bonds outstanding grew by 13.1%. Government bonds outstanding were up 5.9% q-o-q (on an LCY basis) in 2Q09. The stock of central government bonds—comprising treasury bills, treasury bonds, Seoul Metropolitan bonds, and National Housing bonds—were up 2.6% q-o-q. Central bank bonds—mainly comprising monetary stabilization bonds—grew 14.5% q-o-q. Industrial finance debentures rose slightly. On a y-o-y basis, total government bonds outstanding rose 10.7% boosted by double digit increases in central bank bonds (16.3%) and industrial finance debentures (16.7%). The stock of central government bonds also rose by 7.0% y-o-y.

Meanwhile, corporate bonds outstanding grew 4.8% q-o-q in 2Q09, and by a more substantial 15.2% on a y-o-y basis. About 23% of corporate bonds outstanding were issued by private non-financial corporates. Banks were the largest segment of the corporate bond market, accounting for 35% of the total.

The monthly government bond turnover ratio in Korea rose to 0.30 in June, after dropping to a low of 0.19 in November. Trading value has also recovered reaching KRW158.32 trillion in June. The corporate bond turnover ratio improved to 0.08 in February through April before dropping to a low of 0.06 in June. Trading value reached KRW33.96 trillion.

The first half of 2009 saw measures by the government to help boost domestic demand and jumpstart the slumping economy. The National Assembly (Parliament) approved the government's supplementary budget in the amount of KRW28.4 trillion in April, which will be funded mainly through the sale of government bonds. Also, Bank of Korea (BOK) and the US Federal Reserve have agreed to extend their currency swap arrangement until 1 February 2010 to contribute to the continuing stability of foreign currency and financial markets in Korea.

In the bond market, foreign investors are now exempted from withholding taxes on interest income and capital gains taxes when investing in treasury bonds and monetary stabilization bonds. Also, the Financial Services Commission (FSC) has allowed institutional investors to purchase a limited amount of foreign currency-denominated bonds issued by Korean companies. The rule, however, does not include convertible bonds, bonds with a warrant, and exchangeable bonds.