South Korea’s central bank will launch a bond purchase program worth 5 trillion won ($4.2 billion), its biggest in nine years, to ease some of the oversupply from massive sovereign debt issues that would be needed to finance the budget deficit.

“We plan to buy state bonds to preemptively respond to any supply-demand mismatch in bonds or fluctuation in market rates that may take place from increases in public debt supply,” the Bank of Korea (BOK) said Tuesday.

The BOK’s bond purchases over the next three months would be its largest since 2011.

Korea has proposed another record spending plan for next year to jumpstart the ailing economy amid the COVID-19 pandemic. The government plans to issue as much as 172.9 trillion won of sovereign debt in 2021, with nearly 90 trillion won to cover up for the deficit. The debt ceiling for this year was 167 trillion won.

The government has unleashed three supplementary budgets this year totaling 59 trillion won to prop up the virus-hit economy. It is packaging another stimulus bill worth 7 trillion won, which is also likely to be covered by new debt issues.

Concerns of oversupply are weighing on the bond market.

The yield on the three-year government bond, which hit a record low of 0.795 percent earlier last month, shot up to 0.949 percent Tuesday. It came down slightly to 0.917 percent Wednesday morning upon the central bank plan. Short-dated monetary stabilization bond hovered at 0.638 percent and one-year government bond at 0.7 percent, far higher than the 0.5 percent benchmark rate. Bond yields and prices move in opposite directions.

Kim Jin-il, professor of economics at Korea University, said the BOK’s bond purchase is a “necessary move” to curb the rising yields. BOK Governor Lee Ju-yeol last month said the central bank was ready to buy treasury notes anytime to keep the markets stable.

By Song Min-geun, Kim Hyung-joo and Kim Hyo-jin

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]