As the popularity of Government Bonds for individual investors varies by maturity, the Ministry of Economy and Finance has found itself in a dilemma. While relatively short-term bonds of less than 5 years sell well, long-term bonds of 10 years and above are not being absorbed. This has led to hundreds of billion won worth of long-term bonds falling short each month, necessitating their conversion to 5-year maturities for subscription. In response, the Ministry of Economy and Finance is examining ways to stimulate the market for 10-year and 20-year Government Bonds for individual investors.
According to the financial authorities on the 26th, the 10-year Government Bonds for individual investors have seen subscription shortfalls since September last year, four months after sales began, while the 20-year Government Bonds have faced similar issues since their initial sale in June last year. This indicates that the amount subscribed by individual investors was less than the volume the Ministry had planned to issue for each maturity, suggesting that the market response has not followed the government's expectations.
In this regard, a Ministry of Economy and Finance official noted, "We are internally reviewing measures to activate long-term Government Bonds for individual investors." However, at this point, they refrained from discussing specific improvement measures.
As early as March this year, the Ministry of Economy and Finance diversified Government Bonds to encourage individual investment. The introduction of the 5-year bonds also occurred at this time. They achieved a sellout right after the launch. At the time, the Ministry planned to issue 60 billion won worth, but total subscriptions reached 115.1 billion won. Last month, out of a 70 billion won offering, 114.9 billion won was gathered.
As a result, the Ministry of Economy and Finance has decided to issue 80 billion won worth of 5-year Government Bonds this month, an increase of 20 billion won from the initial amount. In contrast, looking at the issuance scale of the 10-year bonds from the beginning to now, it has decreased from 100 billion won to 40 billion won. Similarly, the issuance of the 20-year bonds has shrunk from 100 billion won to 10 billion won during the same period.
Government Bonds for individual investors have clear disadvantages. Generally, the revenue from bond investments consists of interest income generated at maturity and capital gains obtained by selling the bonds to others before maturity.
However, the Ministry of Economy and Finance has blocked individual investors from pursuing capital gains. The rationale was to support individuals in forming retirement assets, but this feature has hindered the popularity of long-term Government Bonds for individuals. Purchasing long-term bonds means assets are tied up for either 10 or 20 years. Although it is possible to request a repurchase before maturity, this can only be done after one year of enrollment.
The poor subscription of long-term bonds is a troublesome issue for the government. If there is a shortfall in the 10-year or 20-year bonds, the Ministry of Economy and Finance will reduce the maturity of those bonds to 5 years for issuance. Instead of issuing them directly as 10-year or 20-year bonds, shortening the maturity increases the burden of future Government Bond issuance. While this may not be a problem if interest rates drop in the future, it can increase financing costs if rates rise.
The Ministry of Economy and Finance has four major options it could adopt to encourage active investment in long-term Government Bonds for individuals. The first is to diversify sales channels. Currently, Mirae Asset Securities is the sole seller of Government Bonds for individual investors. The benefits of selling these bonds are outweighed by the effect of attracting customers. According to Mirae Asset Securities, approximately 131,000 accounts for Government Bonds for individuals have been opened in the past year.
The second option is to raise interest rates. When held to maturity, Government Bonds for individual investors offer not only the nominal interest rate but also compound interest on the additional charge, suggesting that raising these rates could enhance the attractiveness of investments. When the Ministry initially issued Government Bonds for individuals, the additional charges were set at 0.15% for 10-year bonds and 0.30% for 20-year bonds. Considering the nominal interest rate, the final rates are 3.69% for 10-year bonds and 3.725% for 20-year bonds.
The third option is to provide additional tax benefits for long-term bonds. Currently, the interest income for investments up to 200 million won in Government Bonds for individuals is subject to a separate tax rate of 14%, meaning there is no concern about comprehensive taxation of financial income (up to 49.5%). However, many believe that additional tax benefits may not be feasible as the Ministry of Economy and Finance would need to consider equity with similar products. Lastly, the proposal is to open the market for individuals to pursue capital gains.
An informant from the bond industry stated, "Government Bonds for individual investors lack capital gains, making them completely different from existing bond products," adding that "the Ministry of Economy and Finance should have understood investor demand from the outset when designing the system, but it seems they underestimated the market."