The streak of sellouts for individual-investor Government Bonds fell short of subscriptions for three straight months starting in June. Popularity is fading fast as the extra interest benefit (spread) offered on individual-investor Government Bonds was cut to maintain parity with other financial products.
Individual-investor Government Bonds are risk-free assets with principal and interest guaranteed by the government. Government Bonds are mainly bought by financial institutions such as banks and securities firms, but an individual-investor version was issued starting in June 2024 with the aim of supporting the public's long-term asset building.
◇ Of the 150 billion won targeted in August, 142.3 billion won was subscribed
According to the Korea Securities Depository on the 26th, 150 billion won of individual-investor Government Bonds was scheduled to be issued in August, but subscriptions totaled only 142.3 billion won. Four of the five tranches fell short, except for the 5-year. The 10-year tranche targeted 50 billion won but drew only 40.9 billion won. The 20-year, which was slated for 20 billion won, attracted just 15.6 billion won, and the 3-year (coupon and compound interest) filled only 6.7 billion won of the 10 billion won. By contrast, the 5-year drew 78.9 billion won, exceeding its 70 billion won cap.
Individual-investor Government Bonds have fallen short for three consecutive months since June. Of the 200 billion won targeted in June, subscriptions totaled only 179.7 billion won. In July, the issuance size decreased to 160 billion won, and subscriptions dropped more sharply to 136.4 billion won.
That contrasts sharply with January through May, when every tranche sold out. During those five months, subscriptions reached 1.8313 trillion won, more than double the total issuance of 900 billion won. In particular, March drew 444.4 billion won for a 180 billion won target, for a competition ratio of 2.47 to 1.
Individual-investor Government Bonds pay interest annually on a compound basis by adding a spread to the coupon rate. The coupon is set to the rate on Government Bonds issued to financial institutions, with an additional spread depending on market conditions. There is also an advantage that if held to maturity, up to 200 million won of interest income is taxed separately at a 15.4% rate and not included in comprehensive income tax. The maximum annual investment per person is 200 million won.
◇ Interest benefits halved since June
The drop in popularity of individual-investor Government Bonds stems from the government's reduction, starting in June, of the interest benefit (spread) it supports. With lower yields, their investment appeal has weakened. The spread on the 10-year tranche exceeded 1% from January to May, but fell to 0.5%—half—starting in June. The 20-year's spread also dropped over the same period from as high as 1.3% to around 0.4%–0.8%.
Another reason for weaker demand is that the domestic KOSPI has been hitting record highs day after day. The difficulty of retrieving invested funds for 10 or 20 years once invested is also acting as a burden.
Some say the criteria for setting the spread need to be clarified, noting that the spread is being set at the government's discretion. In its "Analysis by committee of the 2025 settlement of account" published last month, the National Assembly Budget Office said, "The government's operation of the spread could weaken the nature of individual-investor Government Bonds as marketable products."
The government said it lowered the spread to align with other products. As Government Bond yields have risen recently, yields on individual-investor Government Bonds have also climbed, and keeping the spread high could crowd out other products such as deposits and installment savings.
A Ministry of Economy and Finance official said, "Because Government Bond yields have risen too much, raising the spread on top of that could crowd out financial products in the market," and added, "As stock prices have risen two to three times, interest in individual-investor Government Bonds seems to have waned."