SEOUL -- The Bank of Korea said Friday that it will buy 5 trillion won ($4.5 billion) to 7 trillion won worth of government bonds by June, a move that comes in tandem with the government's plans to issue more debt to cover mounting costs stemming from the pandemic.
The central bank will announce details of the purchase in the secondary bond market one day before bidding. Seven banks and 13 brokerages selected by the BOK will bid for the bonds.
"We aim to resolve market rate volatility as the government is expected to increase its bond issuance considerably," the BOK said in a statement. "We plan to take additional actions to stabilize the market if needed."
Global stocks slumped due to a rise in the 10-year U.S. Treasury Bond yield, which climbed to its highest since last February, unnerving investors who fear that higher inflation will spur the Federal Reserve to raise interest rates.
The government plans to submit an extra budget worth 20 trillion won to the National Assembly next week, to help it pay for its fourth set of "disaster subsidies" to small business owners whose income was hit by the pandemic. The ruling Democratic Party said that the government will issue bonds worth less than 15 trillion won to cover the extra budget.
"This [move comes] amid concerns of a supply-demand mismatch of Korea Treasury Bonds, which has resulted in widening the spread between long-term and short-term KTBs," Yoon Jee-ho, an economist from Citi Research said in a note. "Governor Lee [Ju-yeol] has expressed his concerns that the spread is wider in comparison with the historical spread, and ahead of the announcement of details of the supplementary budget next week, the BOK acted first to calm market volatility.
"Five to 7 trillion won of purchases as a support mechanism for markets may easily get overwhelmed if we get confirmation of additional fiscal stimulus and global interest rates continue to rise," Yoon added.
President Moon Jae-in has ordered the finance ministry to speed up the process of paying subsidies next month, partly because key elections for the mayors of Seoul and Busan will be held on April 7. Moon and his DP are keen to win the elections in the country's two biggest cities as they will be a gauge of voters sentiment ahead of the presidential election in March next year.
The ruling party initially wanted to pay universal subsidies to all citizens, but Finance Minister Hong Nam-ki opposed this plan due to financial burdens. Moon said that the government will give handouts to the entire population later to comfort all the people who suffered during the pandemic.
The South Korean economy has weathered the crisis relatively successfully, with gross domestic product falling only 1% last year thanks to strong exports from sectors such as semiconductors. The BOK forecast that Asia's fourth-largest economy will grow 3% this year.
However, the number of jobs in January was down almost one million from a year ago, hitting the lowest number in 23 years. The service industry bore the brunt, losing 898,000 positions during the same period as consumption plunged sharply.