KOREA CAPITAL MARKET INSTITUTE

In response to the global financial crisis and the European fiscal crisis, Korean government rapidly increased its fiscal spending, most of which were financed through Korean Treasury Bond(KTB). As a result, KTB market is growing both in terms of balance outstanding and trade volume. It is important to maintain the liquidity and efficiency of the KTB market at current level in order for the government to rely on the KTB market as a main funding source.
This paper aims to provide policy implications on the government debt management and alternatives to widen the investor base. We rely on the comparative analysis method to identify strength and weakness of foreign government bond markets. We conducted comprehensive market investigation on 10 developed countries in the North America, Europe, and Asia.
We found that all of the countries included in our study are imposing restrictions either on the total balance outstanding or on volume of the net issuance(that is, the increment in the balance outstanding) of the government bond in order to control the national debt growth. Under the limit on the debt ceiling, governments have discretionary power to determine the annual issuance size and issuance timing. We also found that the most of the countries in our investigation are allowing early redemption to provide extra liquidity on the seasoned government bonds. In this case, the governments do not need acquire the agreement from the Parliaments. Governments are able to implement the early redemption if they can reduce the long-run funding cost through the early redemption.
Half of countries in our study including U.S., Japan, U.K., Canada, and Germany allow individual investors-only type government bonds. Investment unit for the individual bonds is usually much smaller than the general government bonds so that individuals can rely on this product to increase their savings. In some countries, tax incentives and on-line retail systems are also provided by the government to encourage participation. However, most of countries are experiencing slow-downs in the individual government bond markets.
The analysis offers a few clear implications on the KTB market. The future policy changes for the KTB issuance need to minimize the funding costs by allowing more issuance flexibility. It is desirable to switch national debt management method from the current issuance-ceiling approach to debt-ceiling approach. The debt-ceiling approach would give the government more rooms to respond elastically for market environment changes. It is necessary to amend the National Fiscal Act to complete this transition.
In order to expand the demand base for the government bond, it might not be the right policy choice to introduce individual investors-only type government bonds. This type of government bond market is obviously inactive in many foreign countries and is not likely to be a well-functioning one in Korea as well. It might be more efficient to develop active bond-fund market targeting individual investors for obtaining deeper bond investment base.