Amid the global bond market turmoil, South Korea reduces government bond issuance, while Japan states it will appropriately control the total annual government bond issuance.

As the global bond market sell-off continues to spread, Asia's two largest economies have taken action one after another, attempting to stabilize their domestic bond markets by reducing the supply of government bonds.

On October 1, the South Korean Ministry of Finance announced that the volume of government bond issuance for the month would be reduced by 5 trillion won from the original plan to 12 trillion won, and explicitly stated that "further reductions in government bond issuance will be considered if necessary." Meanwhile, Japanese Prime Minister Sanae Takaichi said that both the initial and supplementary budgets would be considered, and that the "annual total government bond issuance will be appropriately controlled."

The statements from both countries point in the same direction: under pressure from global yields repeatedly hitting historical highs, they are proactively contracting supply to ease market stress. Currently, the yield on 10-year U.S. Treasury bonds has exceeded 5.3%, marking a new high since 2002; the yield on 30-year UK government bonds has risen above 6% for the first time since 1998.

South Korea: Using Surplus Tax Revenue to Reduce Issuance of Government Bonds of All Durations

According to the latest local media reports, South Korea's Ministry of Finance will use higher-than-expected tax revenues as the source of funds for this round of reduction.

The statement shows the scale of reductions by duration as follows: 1 trillion won reduction in 2-year government bonds, 800 billion won each for 3-year and 5-year bonds, 700 billion won each for 10-year and 30-year bonds, and 200 billion won for 50-year bonds.

For the actual issuance arrangements in October, 12 trillion won will be issued through competitive bidding among primary dealers, with an additional 500 billion won issued through bond exchanges. In addition, the government plans to conduct buyback operations of about 3.5 trillion won for 2-year, 3-year, 5-year, and 10-year government bonds that have passed their original issue dates but have not yet matured.

Market participants expect the government may further reduce government bond issuance of all durations in November and December, with the total annual supply contraction likely to exceed 10 trillion won.

Japan: Sanae Takaichi Pledges to Control Government Bond Issuance, Also Responds to Exchange Rate Controversy

On the Japanese side, Prime Minister Sanae Takaichi’s remarks covered both government bond management and exchange rate matters.

According to a Reuters report on October 1, in terms of government bond management, Sanae Takaichi stated she would "appropriately control the annual total government bond issuance, taking into account both the initial budget and any supplementary budgets."

On the exchange rate issue, Sanae Takaichi noted clearly that "I have told President Trump that the undervaluation of the yen is a problem," while emphasizing that "the foreign exchange market is determined by multiple factors" and "Japan's economic policy is not aimed at manipulating exchange rates." She further explained: "Our policy is aimed at improving the competitiveness of the Japanese economy, which will strengthen market confidence in the yen."

Additionally, Sanae Takaichi said that it is expected that food consumption tax relief measures will be reflected in retail prices.

Global Bond Market: Multiple Forces Resonating, Yields Hit Multi-Decade Highs

On October 1, the yield on 10-year U.S. Treasury bonds rose by 4 basis points to 5.348%, surpassing the 2007 high and reaching the highest since 2002; the 30-year U.S. Treasury yield also touched its highest level since 2002. The yield on 30-year UK government bonds rose to 6%, the first time since March 1998. French government bond yields reached an 18-year high, while the spread between French and German yields widened to its highest since June 2012. Japan's 10-year government bond yield also rose to 3.11%.

The Bloomberg Global Aggregate Treasury Total Return Index yield has reached its highest level since 2000, and global bonds have posted a cumulative loss of 2.7% this year.

Factors driving the current sell-off include: escalating tensions in the Middle East pushing up energy prices, sustained high inflationary pressure, global government debt for the first time surpassing $40 trillion, and the continued expansion of fiscal deficits in various countries. AXA Group Chief Economist Gilles Moec stated, "Even though some key thresholds have already been breached, long-end yields may not yet have reached a self-stabilizing level."