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BOK to downsize bond issuance for market stabilization

Collected: 2016.11.27

Distributed: 2016.11.28

Source: Go Direct

South Korea’s central bank has decided to cut the size of monetary stabilization bonds (MSBs) issuance as a part of efforts to curb interest rates that have been on an upward spiral in the wake of Donald Trump’s surprise victory in the recent U.S. presidential election and unprecedented political crisis involving the incumbent president facing criminal charges and impeachment over power abuses at home.

Monetary stabilization bonds are a policy tool devised by the Korean government to control excess liquidity in the open markets. The Bank of Korea (BOK) issues the MSBs to financial institutions or individuals to influence the amount of money in circulation and interest rates.

The central bank said Friday that it has decided to abandon initial plans to issue 1 trillion won ($849.3 million) worth of MSBs, including one-year maturity bonds worth 500 billion won and short-term 91-day bonds worth 500 billion won. It also plans to scale down the size of MSB issuance planned in December. Instead, it will issue 300 billion won worth of 91-day bonds on Monday.

Such action would reduce supply of bonds in the markets, whereas demand for bonds would spike. The prices of bonds would, in turn, go up leading to a decline in interest rates.

Shortly after the announcement of cutback in MSBs on Friday, 10-year government bonds and 1-year bonds rose 0.2 basis point and 0.7 basis point, respectively, both reaching the highest figures so far this year.

The BOK also purchased 1.27 trillion won worth of treasury bonds to help stabilize markets on Nov. 21 for the first time since the 2008 global financial crisis.

By Boo Jang-won

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