Market Summary

Yield Movements

The Republic of Korea's local currency (LCY) government bond yields remained range-bound between 15 June and 15 August, given market expectations that the Bank of Korea would maintain the base rate at its 16 July meeting following a 50-basis points rate cut in May. In particular, the prior rise in yields for long-term papers observed from March to May tapered during the current review period. This was tempered by expectations of a Bank of Korea bond purchase program to address the oversupply of bonds in the market. However, a rise in yields at the long-end of the curve was observed in August due to talks over a fourth supplementary budget and as the market anticipated the release of the 2021 fiscal budget.

Size and Composition

The Republic of Korea's LCY bond market grew 3.1% quarter-on-quarter (q-o-q) to KRW2,553.7 trillion (USD2.1 trillion) at the end of June, up from the 2.8% q-o-q growth posted in the first quarter of 2020. Growth in the domestic bond market at 4.6% q-o-q continued to be driven by the rising stock of government bonds, particularly central government bonds. Corporate bonds also posted growth but at a slower pace of 2.1% q-o-q. The Republic of Korea's LCY bond market expanded 9.5% year-on-year in the second quarter of 2020, up from the 8.7% year-on-year growth posted in the first quarter of 2020.

Policy, Institutional and Regulatory Developments

On 3 September, the Government of the Republic of Korea submitted the 2021 fiscal budget proposal totaling KRW555.8 trillion, primarily to aid in economic recovery and support the Korean New Deal. The 2021 budget is 8.5% higher than the original 2020 budget and 1.6% higher than the final 2020 budget that included three supplementary budgets in response to the COVID-19 pandemic.