The U.S. Federal Reserve's recent interest rate hike, the first in over three years, has raised concerns about the government's bond procurement costs for next year. Although the total issuance of government bonds is expected to decrease slightly compared to this year, the volume of maturing bonds that need to be refinanced is significantly increasing. If market interest rates rise above initial budget assumptions, the interest burden could grow. However, existing bonds have fixed rates, meaning that increases in market rates do not immediately affect the overall national debt.
According to the Ministry of Economy and Finance and the Office for Government Policy Coordination, the government has assumed a government bond rate of 4.1% while preparing next year's interest expenditure budget. On September 17, the yield on three-year government bonds closed at 4.063%, while the ten-year bonds finished at 4.506%. It is difficult to definitively state that there is a significant gap between the assumed rates during budget preparation and the actual market rates, but long-term bonds are already forming rates around 4.5%.
Additionally, the Federal Reserve raised its benchmark interest rate by 0.25 percentage points to a range of 3.75% to 4.00% on September 16, leaving open the possibility of further increases this year, which could add upward pressure on domestic bond rates.
However, the increase in U.S. rates does not immediately translate into a surge in government interest costs. Existing government bonds pay fixed interest rates established at the time of issuance, meaning the actual burden increases only when new bonds are issued or when maturing bonds are refinanced at higher rates.
Next year, the volume of maturing bonds alone is expected to reach 110.7 trillion won. If the refinancing rates exceed those of existing bonds, interest costs could accumulate alongside new issuances. A structural increase in interest expenses could limit the resources available for other fiscal projects aimed at growth and public welfare.
According to the recently announced 2027 budget proposal, the government plans to issue a total of 222.8 trillion won in government bonds next year, a decrease of 2.9 trillion won from this year's issuance plan of 225.7 trillion won. Of this, 96.3 trillion won will be for new fiscal needs, while 110.7 trillion won will be for maturing bonds. The amount allocated for market-making activities, including buybacks and exchanges, is set at 15.9 trillion won.
The Ministry of Economy and Finance indicated that there is room to adjust the proportion of ultra-long-term bonds, such as 20, 30, and 50-year bonds, based on market conditions. By spreading out the issuance timing or adjusting the proportion of bonds by maturity according to market conditions, the short-term impact of rising rates could be somewhat mitigated.
However, a ministry official noted that it is challenging to calculate the impact of changes in U.S. benchmark rates on domestic bond procurement rates based solely on the benchmark rate. Government bond rates are influenced by various factors, including the interest rate differential between South Korea and the U.S., domestic and international bond supply and demand, and the national debt situation.
On September 17, the domestic bond market did not show an immediate surge following the Fed's rate hike. This is interpreted as a result of the market already pricing in expectations of the Fed's rate increase, along with other variables affecting domestic rates.
Experts predict that the U.S. rate hike is likely to impact domestic rates. Professor Kang Sung-jin of Korea University stated, "The Bank of Korea is also likely to raise its benchmark rate, which could affect government bond rates. Newly issued bonds may bear higher procurement rates due to rising market rates."
He further advised that the government's fiscal response should focus on vulnerable groups, as the impact of rising rates varies among economic actors. He noted, "Low-income individuals and small business owners, who carry significant debt and have limited capacity to absorb such burdens, may be more adversely affected by rising rates. The government needs to develop targeted fiscal policies for these groups."
* This article has been translated by AI.
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