Korean Treasury Bond (KTB) Market: H1 review and H2 policy direction
Extend the benchmark yield curve through the issuance of 20-year Korean Treasury Bond (KTB);
Introduce STRIPS (Separate Trading of Registered Interest and
Principal of Securities) that mitigates the risk associated with holding
long-term debt instruments;
Shift the benchmark treasury bond into longer-end of the yield curve, from 3-year to 5-year KTBs for longer cash-flow; and
Enhance the accessibility of government securities market by lowering the multiple-to-bid amount from existing 10 billion KRW to 1 billion KRW.
Issuance
The first-half issuance of KTBs totaled 34.5 trillion KRW or 52.6% of annual KTB market financing estimates in FY 2006. 3-year, 5-year, 10-year, and 20-year KTBs have been issued in proportion of 26:39.9:24.6:9.6, respectively, close to the initially scheduled proportion of 25:40:25:10, with balanced monthly issuance spread throughout the year to ensure predictability in market. The average bid-to-cover ratios chalked up 189.2%, 142.2%, 164.9%, and 143.2% for 3-, 5-, 10-, and 20-year KTBs, respectively, proving the successful debut and integration of the longest KTB instruments scheduled to post the issuance volume of 6.6 trillion KRW in FY 2006. On the back of active issuance, KTBs have established themselves as the force to be reckoned with in domestic capital market, accounting for 18.1% of the entire debt market issuance with the size of 190.4 trillion KRW.
Secondary Market
Of the first half trading of entire debt instruments valued at 831 trillion KRW, KTBs represented 58.4% or 460 trillion KRW, of which electronic screen trading took up 31%. The turnover ratio of KTBs, at 240.7%, hovers at more than twice that of entire debt securities market that registered 112.2%.
The interest rate, which exhibited a steady declining trend before the year-end 2005, has shown the signs of bouncing back in the wake of reduction in global liquidity and monetary tightening around the world. The Bank of Korea proceeded with the 25-bp hike of its benchmark call rate in February and June to bring it up to 4.25%, while its counterpart in the US also ratcheted up the federal fund rate on four different occasions in the first half, raising the benchmark interest rate to 5.25%. The European Central Bank and the Bank of Japan were no exception to this trend as ECB lifted its benchmark rate by 25-bp on two separate occasions to 2.75% and Japan announced its intent to abandon quantitative loose monetary policy in March.
Futures and RP
The trading volume for KTB futures has totaled 5.37 million contracts, each representing 100 million KRW, while their average daily trading equals 43,284 contracts in the first half alone, quite a surge compared to 29,409 contracts in FY 2004 and 45,073 contracts in FY 2005. As part of ongoing efforts to foster repo market in Korea, the government has invested operating cash surpluses from the Public Capital Management Fund in repo contracts, the fruition of which came about recently as the trading volume of exchange-traded repo contracts reached 12.8 trillion KRW in the first-half alone, 3.4 times the entire trading volume of 3.8 trillion KRW in FY 2005.
Road Ahead: FY 2006
The Ministry of Finance and Economy is scheduled to issue 31.2 trillion KRW of KTBs in the second half this year. As announced at the beginning of FY 2006, the government will continue to issue 3-year, 5-year, 10-year, and 20-year KTBs in proportion of 25:40:25:10, respectively, with balanced monthly issuance spread throughout the year. The buyback amount is set to reach 5 trillion KRW in the latter half this year.
The government initiatives to foster liquid government securities market mesh with ongoing efforts to enhance the infrastructure governing primary dealer system and primary market. The government will enforce more stringent criteria for primary dealers, including narrower bid-asked spread requirement, better bidding performance, and more intra-exchange trading activities. The government is currently exploring a number of ideas to match these enhanced criteria in evaluating primary dealers with commensurately attractive privileges, such as a bi-annual publication of top five “league table,” a semi-annual meeting with Vice Minister of MOFE, and the introduction of non-competitive bid options under which top-tier primary dealers may enjoy the privilege of exercising call-options on the KTBs, at the awarded yield to competitive bidders, in two or three days after the auction.
In keeping with the initiatives to address the needs of retail and foreign investors and thereby broaden investor base, the government is currently in the process of canvassing market demands and conditions for a wide array of treasury products, including government bonds in smaller denominations for retail investors and inflation-linked products. Upon completion of the market survey in July and further research, MOFE will announce the policy direction tailored to best reflect the market conditions and the recommendation set forth in the research.
[Reference]
What are Inflation-Linked Bonds?
Inflation-linked bonds are a type of medium to long term marketable security whose interest payments and principal are adjusted semi-annually, based upon changes in the Consumer Price Index. Investment is always protected from inflation because the interest rate is applied to the adjusted principal; so if inflation occurs, interest earned increases. Inflation-linked bonds, often called linkers, were first introduced in the 1960s by Brazil. The market has grown substantially since then with the UK (1981), Australia (1985), Canada (1991), Sweden (1994), US (1997), France (1998), Japan (2004), and Germany (2006) all issuing linkers.
Example: How to Calculate Cash Flows with Inflation-Linked Bonds
Suppose you made a purchase on an inflation-linked bond with the principal of 10 billion KRW, the coupon rate of 4%, and the maturity of 10 years that pays its coupon payment semi-annually. The semi-annual interest payment is calculated using the mathematical formula as follows:
Principal amount x Reference CPI applicable to the date of payment / Reference CPI applicable to the date of issuance x Coupon rate x 1/2
The diagram below illustrates the cash flows that investors receive under the assumption described above. Notice that the amount of coupon payments and principals moves in lockstep with increases in CPI, hedging the risk against loss of value that would have otherwise occurred in fixed cash flows.
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2008년 10월 6일 16:30
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2008년 8월 6일 17:21