The Lee Jae-myung government announced its second supplementary budget of the year to boost domestic demand, while KB Securities projected on the 19th that there would not be a short-term shock since the bond market had already reflected the supplementary budget after the presidential election. However, it noted that the large volume of bonds to be absorbed in the second half of the year is a concern.
The government's supplementary budget is set at a total of 30.5 trillion won. Of this, 19.8 trillion won will be raised through deficit government bonds. Lim Jae-kyun, a KB Securities researcher, said, "The size of the supplementary budget could change during the National Assembly deliberation process, but since the ruling party is the majority, there shouldn’t be a significant difference from the government proposal."
Considering the deficit government bonds under the second supplementary budget, the scale of government bond issuance this year is expected to increase from 207.1 trillion won to 226.9 trillion won. Taking into account the government bonds issued and remaining competitive bids by the end of this month, Lim estimated that the issuance volume in the first half of this year would be around 120.5 trillion won. It is expected that up to 106.4 trillion won will be issued in the second half of this year.
A simple calculation indicates that the monthly average issuance in the first half is 20.1 trillion won, and it will slightly decrease to 17.7 trillion won in the second half. The issue is that the issuance volume tends to be smaller during November and December due to book closing. In the past decade, the issuance volumes in November and December were 83% and 46% of the average levels in July to October, respectively.
Lim stated, "In the months of July to October, an average of 20.1 trillion won in government bonds will be issued, with 16.7 trillion won in November and 9.3 trillion won in December anticipated," adding, "The issuance volume similar to the first half could be a burden until October as the competitive bidding volume in the first half was 17 trillion won."
There are variables to consider. The World Government Bond Index (WGBI) biannual review is scheduled to be released as early as the end of September or the beginning of October. Depending on the inclusion effects of the WGBI, tracking funds may proactively flow in, which implies that it may be possible to increase the issuance volume in November and December compared to past years.
The government bond issuance plan for July, which is coming out on the 26th, also needs to consider the scale of issuance by maturity. The Ministry of Economy and Finance maintained a significantly high proportion of 30-year bonds at the beginning of the year, but has increased the proportion of 2- to 3-year bonds this month. Since deficit government bonds are sensitive to long-term interest rates, and considering that the interest rates for 10-year and 30-year bonds have risen significantly this month, Lim predicts that the ministry may expand the issuance ratio of short-term bonds further.
Lim noted, "Considering the procurement expense, short-term interest rates are still low, but compared to the bond issuance plan in June, expectations for interest rate cuts have declined, and if the proportion of short-term bonds is increased, there is a concern that short-term interest rates may rise further."