Market Summary

Yield Movements

The Republic of Korea’s LCY government bond yield curve slightly flattened between 15 June and 15 August as yields for short-term to medium-term tenors rose, while those for long-term tenors fell. Yields at the shorter-end of the curve rose on increased expectations of a rate hike by the Bank of Korea before the year ends. Subsequently on 26 August, the Bank of Korea decided to raise the base rate by 25 basis points to 0.75%. Meanwhile, yields at the longer-end of the curve fell, tracking the global downward trend in long-term yields on weakening optimism and expectations of a slowdown in the global economic recovery amid the rise in cases of the more transmissible delta variant of COVID-19.

Size and Composition

The size of the Republic of Korea’s LCY bond market increased to KRW2,756.4 trillion at the end of June on growth of 2.3% quarter-on-quarter (q-o-q), which is slightly lower than the 2.4% q-o-q expansion registered in the previous quarter. Growth for the quarter was largely driven by the government sector, while the corporate sector grew at a slower pace. The outstanding size of the Republic of Korea’s LCY government bond market rose 3.2% q-o-q to KRW1,158.3 trillion; and the corporate bond market grew 1.6% q-o-q to KRW1,598.2 trillion. From the same period in 2020, the Republic of Korea’s bond market grew 7.9% year-on-year. 

Policy, Institutional, and Regulatory Developments

On 24 July, the National Assembly passed the second supplementary budget for 2021 worth KRW34.9 trillion, bringing the overall budget for 2021 to KRW604.9 trillion from an original amount of KRW558 trillion. This was the sixth supplementary budget related to the government’s response to the pandemic since 2020. The new 2021 budget is expected to produce a fiscal deficit equal to 4.4% of GDP and cumulative government debt equal to 47.2% of GDP.