An analysis says insurers, the "big players" in the bond market, are fanning the recent rise in Government Bonds yields. Insurers have long invested heavily in long-maturity Government Bonds to prepare for future insurance payouts. But this year, insurers' net purchases of long-term bonds have fallen by more than 7 trillion won. In the insurance industry, people are saying the appeal of long-term Government Bonds has diminished as market interest rates have risen.
According to the Korea Financial Investment Association on the 20th, this year insurers' net purchases of Government Bonds with maturities over 10 years totaled about 14.8 trillion won, down 33% from the same period last year (22 trillion won). That drop is more than 2.5 times larger than the decline in net purchases of long-term bonds by all investors over the same period (13%).
Bond market participants are paying attention to insurers' "change of heart," as they had been the big players in the Government Bonds market. Insurers have managed risk by investing in long-maturity Government Bonds to prepare for paying policyholders at least 20 to 30 years down the line. But as market interest rates have risen since the second half of last year, the value of their bond holdings has fallen. There is less reason to buy a lot of bonds.
Also, as rates have risen, it has become easier for insurers to meet the financial authorities' fiscal soundness supervision standard, K-ICS. Because K-ICS discounts insurance liability to present value, an increase in market interest rates has the effect of reducing insurance liability.
Analysts say this situation is partly contributing to the recent rise in Government Bonds yields. In Korea, 10- to 50-year Treasury yields rose from the low 3% range at the start of the year to the mid- to high 4% range in mid-month. The biggest factor is that major countries' Government Bonds yields in the United States, Europe, and Japan surged on fears of a rapid increase in national debt, and Korea moved in sync with them.
A Ministry of Finance and Economy official said, "In Korea, rather than concerns about a fiscal deficit, synchronization with major countries' Government Bonds yields, the possibility of inflation due to high growth, and a reduction in insurers' net purchases are affecting the rise in yields." Although Korea's government debt is also increasing rapidly, the ratio of government debt to gross domestic product (GDP) is in the 40% range, which is better than major countries where the ratio is as low as 80% and exceeds 200% at the high end.
The rise in major countries' Government Bonds yields has calmed for now. The U.S. Treasury said on the 19th (local time) it would expand its buyback of long-term Government Bonds from $2 billion to at least $4 billion. But this is a temporary measure, and because concerns about the fiscal deficit have not been resolved, Government Bonds yields could continue to rise. A Ministry of Finance and Economy official said, "If market volatility expands sharply, we will also consider necessary measures."