Fiscal, financial and monetary chiefs agreed Wednesday to prepare contingency measures as Korean bond yields tracked a surge in U.S. Treasury yields.
The government said it could conduct emergency bond buybacks and use part of an expected 63.2 trillion won ($46.6 billion) tax windfall to reduce planned issuance.
Officials also agreed that fiscal and monetary policies could work in tandem as the economy faces heightened external uncertainty and continued pressure on household finances.
The additional revenue gives the government room to reduce the supply of bonds investors must absorb, while emergency buybacks could provide support if market conditions deteriorate.
The rhetoric had immediate effect. The three-year government bond yield fell 6.5 basis points from Tuesday’s close to 4.011 percent, while the 10-year yield dropped 6.9 basis points to 4.407 percent. Most other maturities also moved lower.
The decline followed a climb to multiyear highs as the U.S. 10-year Treasury yield breached 5 percent amid inflation concerns, heavy government borrowing and a hawkish shift among major central banks.
The three-year Korean yield had reached 4.119 percent Monday before easing to 4.076 percent Tuesday. The 10-year yield ended Tuesday at 4.476 percent.
Higher market rates are already feeding through to household borrowing costs.
The average rate on newly issued mortgages rose 0.18 percentage point to 4.66 percent in August, marking a fourth consecutive monthly increase. The overall rate on new household loans climbed to 4.76 percent.
“Markets have generally responded better when authorities clearly state how much they will buy and over what period,” the source said on condition of anonymity because of the sensitivity of commenting on government policy.
Actual purchases could have a stronger stabilizing effect during a crisis, the source said, but domestic intervention would struggle to counter a sustained rise in global yields.
The constraint helps explain the division of labor taking shape in Seoul.
The Bank of Korea (BOK) uses its policy rate to address inflation and financial imbalances, while the government can act more directly on bond supply and market liquidity.
Reducing issuance could ease upward pressure on yields from domestic supply, and buybacks could help contain disorderly trading. Neither would insulate Korea from a global bond selloff.
Kim Sung-soo, a bond strategist at Hanwha Investment & Securities, pointed to growing structural pressure in the U.S. market, where government borrowing and AI-related corporate issuance are adding to bond supply as overseas demand weakens.
Overseas experience nevertheless suggests that targeted purchases can improve market functioning.
The U.S. Treasury has expanded its liquidity-support buyback program, at least doubling the maximum purchase size for some longer-dated securities to $4 billion per operation this month.
A 2025 International Monetary Fund study found modest improvements in liquidity among securities eligible for U.S. buybacks, including a roughly 0.2-basis-point narrowing in bid-ask spreads. Much of the effect, however, was short-lived.
Britain’s intervention during acute market stress in 2022 was more dramatic.
The Bank of England temporarily bought 19.3 billion pounds of long-dated government bonds after forced selling by pension funds threatened to trigger a self-reinforcing market spiral. It later unwound the entire position after conditions stabilized.
Those purchases were explicitly temporary and aimed at restoring market functioning rather than holding yields permanently lower.
Korea has yet to move from signaling support to announcing an emergency operation.
The government has not disclosed the size, target maturities or duration of any emergency buyback. A finance ministry official told AJP that details would be provided once a plan was announced.
No timetable has been given. The government’s regular October bond issuance plan is due Thursday, offering the next indication of how much supply authorities intend to bring to market. Officials have not said whether it will include details of emergency measures.
AJP Takeaways
- Korea has signaled emergency bond buybacks and issuance cuts as rising yields push up household borrowing costs.
- An expected 63.2 trillion won tax windfall gives the government room to reduce planned bond issuance.
- The average rate on new mortgages reached 4.66 percent in August, rising for a fourth consecutive month.
- Supply cuts and targeted purchases could ease domestic market strains, but sustained increases in global yields would limit their impact.
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